THE COMPANIES ACT 2013

The Companies Act 2013 was enacted to consolidate and amend the law relating to
Companies, laid down in the Companies Act 1956.
The aim is to improve corporate governance, simplify regulations, strengthen minority
interests, and introduce provisions relating to whistle-blowers, class action suits, etc.

The Companies Act 2013 contains 470 Sections, 7 Schedules, and 29 Chapters.

This Act is applicable to all companies registered under this Act or previous Companies Act
and Insurance Companies, Banking Companies, Electricity Companies and other Companies or
body corporates incorporated under any special Act (except where the provisions of
Companies Act are inconsistent with the provisions of the respective Acts).

Meaning of Company
A company is defined as a company incorporated under the Companies Act 2013 or
under any previous Company law. [Section 2(20)]

A 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. (Prof Haney)

Features of a Company
1. Separate legal entity Its existence is distinct and separate from that of its members.
2. Perpetual succession Its existence is not affected by the death or change of members.
3. Limited liability The liability of members is limited to the value of shares held.
4. Artificial Legal Person It is created by law, can act as a natural person, thru directors.
5. Common Seal It is the official signature of the company. (Optional since 2015)
Authorization either by two directors or by one director and CS.

Corporate Veil Theory

This refers to the concept that members of a company are shielded from the liabilities
connected to the company’s actions. (Salomon vs Salomon and Co Ltd)

Lifting the veil

This means looking behind the company as a legal person, to the actual persons controlling
the corporate entity. This is done when the corporate veil is used to violate provisions
of any law.
This is done in the following cases:
1. To determine the character of the Company (whether enemy or friend)
A company’s affairs may be under the control of people of an enemy country.
2. To protect revenue / tax
Where a corporate entity is used to evade or circumvent tax.
3. To avoid a legal obligation
It may be used to reduce statutory liabilities like payment of bonus.

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4. Formation of subsidiary to act as agents
A company may be formed to act as the agent of another company.
5. Company formed for fraud / improper conduct / defeat law
Where a company is formed for some illegal or improper purpose.

CLASSIFICATION OF COMPANIES
Different forms of Companies under various classes are given below:

1. On the basis of liability

(a) Company limited by shares [Section 2(22)]
Liability of the members is limited to the extent of the unpaid amount on their shareholding.
(b) Company limited by guarantee [Section 2(21)]
Liability of members is limited by amount stipulated in the Memorandum, which is payable
only on winding up of the company.
(c) Unlimited Company [Section 2(92)]
Liability of members is unlimited.

2. On the basis of members

(a) One Person Company [Section 2(62)]
- OPC is a private limited company
- Minimum paid up capital as prescribed (Not prescribed now)
- Incorporated only by one person as member.
- Memorandum should indicate the name of a person who will become member on the death
or incapacitation of the member.
- The other person should give his prior consent in writing
- He may withdraw his consent or nominee can be changed by giving notice to the Registrar.
- Only a natural person, who is an Indian citizen and resident in India can be a member /
nominee (For being a resident, one should stay at least 182 days in India during the
immediately preceding financial year)
- No person is eligible to become a member or nominee in more than one OPC.
- Minor is not allowed to form OPC or become nominee
- OPC cannot be converted to Section 8 company.
- OPC can be converted to Pvt or Public company after 2 years from the date of incorporation
except where paid up capital exceeds Rs.50 lakh or annual turnover exceeds Rs.2 Crore.
- OPC cannot carry out NBFI activities
- Penalty will be imposed if member or any officer of the OPC contravenes the above provisions
with fine of Rs.10000 and additional Rs.1000 per day while the contravention continues.

(b) Small Company [Section 2(85)]

- A Small Company is a private limited company
- with Paid up capital not exceeding Rs.50 lakh and
- Annual turnover not exceeding Rs.2 Crore
- This is not applicable to a holding company or a subsidiary company or Section 8 Company

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(c) Private Company [Section 2(68)]
- Private Company is a company
- having minimum paid up share capital as prescribed (not prescribed now), which by its
articles:
- Restrict the right to transfer the shares
- can be formed by two or more members
- Limits the number of its members to 200 except for OPC
- Prohibits invitation to public to subscribe to any securities of the Company (Shares /
Debentures / Bonds)
- OPC and Small companies can be formed only as Private companies
- When shares are held in joint names, they will be treated as single member
- Persons who are / were in employment of the company holds shares, they shall not be
included as members

(d) Public Company [Section 2(71)]

- A Public Company is not a private company
- has a minimum prescribed paid-up share capital (not prescribed now)
- Minimum no of members is 7
- No maximum limit on number of members
- Shares are freely transferable
- A Private company which is a Subsidiary of a public company shall be deemed to be a public
company even if such subsidiary company continues to be a private company in its articles.

3. On the basis of control

(a) Holding company [Section 2(46)]
A company is a holding company in relation to one or more other companies where such other
companies are subsidiary companies.
(b) Subsidiary company [Section 2(87)]
A company in which the holding company
i. controls the composition of the Board of Directors; or
ii. exercises or controls more than 50% of the total voting power either on its own or
through one or more subsidiary companies.
iii. A company is deemed holding company for a subsidiary company of a subsidiary company
(c) Associate company [Section 2(6)]
A company in which the other company has significant influence (at least 20% of total
voting power or control or participation in business decisions under an agreement), but
which is not a subsidiary company and includes a joint venture company.

4. On the basis of access to capital

(a) Listed company [Section 2(52)]
A company which has any of its securities listed on any recognized Stock Exchange.

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(b) Unlisted company
A company other than listed company

5. Other Types
(a) Government Companies [Section 2(45)
A Company in which not less than 51% of the paid-up capital is held by
(i) the Central Government or
(ii) any State Government or
(iii) jointly by the Central and State Governments
(iv) includes the subsidiary of a government company.

(b) Foreign Company [Section 2 (42)]

A company or body corporate incorporated outside India, which
(i) has a place of business in India, by itself or through its agents (physically/ electronically) and
(ii) conducts any business activity in India

(c) Companies with Charitable objects [Section 8]

- Companies can be formed for promotion of commerce, art, science, charity, sports, etc.
- Operates under Special License from the Central Government
- Power of Central Govt can be delegated to the RoC.
- Need not use the word Ltd / Pvt Ltd in its name even though it will be a limited company
- Requirement of minimum share capital does not apply
- Requirement of minimum no of directors, independent directors, etc. does not apply
- Uses its profits for the promotion of its objectives only
- Does not declare dividend to its members
- License can be revoked if there is contravention of any condition
- Can call general meeting with 14 days’ notice instead of 21 days
- Need not constitute certain committees of the Board
- On contravention, Central Govt may direct it to
- Convert its status and change its name
- wind up
- amalgamate with another company with similar object
- If there is a default in compliance, it is punishable with fine from Rs.10 lac to Rs.1 crore and
the directors are liable for imprisonment up to 3 years apart from fine of Rs.25000 to Rs.25 lac.
- If affairs are conducted fraudulently, action under Section 447 will be taken.
- A partnership firm can be a member of Section 8 Company

(d) Dormant Company (Section 455)

Where a company is formed for a future project or to hold some asset and has no significant
accounting transactions, such an inactive company can apply to the Registrar for the status of
a dormant company.

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Inactive company means a company which is not carrying on any business or not made any
significant accounting transaction during the last two financial years or has not filed the annual
returns and financial statements during the last two financial years.

(e) Nidhi companies

A company which the Central Government may declare to be a Nidhi or Mutual Benefit Society.

(f) Public Financial Institutions

Institutions, viz. LIC, IDFC, UTI, and other Institutions notified by the Central Government are
regarded as PFIs.
The conditions for declaring as PFIs
(i) Established under any Central or State Act other than Companies Act
(ii) Not less than 51% of the paid-up capital is held or controlled by the Central/State Govts.

MODE OF REGISTRATION (Section 3)

Promoters
(i) Persons who are named in the prospectus or
(ii) who controls the affairs of the company or
(iii) give instructions to the Board of Directors
Procedure
1. Filing of documents with the Registrar
Memorandum
Articles
Declaration of compliance of all provisions, by a person named in the Articles & a
person engaged in the formation of the company (CA / CS / Advocate)
Declaration from the Promoters
Address for correspondence
Details of Promoters and their KYC, DIN, etc.
Particulars of interest of the first directors and their consent
2. Issue of certificate of incorporation
3. Allotment of CIN
4. Copies of all originally filed documents should be kept at the Registered Office till winding
up of the company.
5. If any false information is filed, person responsible shall be liable for action u/s 447 for fraud.
6. Order of the Tribunal will be final and binding
7. SPICe – Simplified Proforma for Incorporating Company Electronically

Effect of Registration
From the date of incorporation,
1. The Company becomes a legal person
2. Separate legal entity
3. Perpetual existence
4. Can enter into contracts
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5. Can acquire, hold or sell properties
6. Can sue or be sued in its name
7. Memorandum and Articles will be binding on the members

CLASSIFICATION OF CAPITAL
1. Nominal or Authorized or Registered Capital
The Capital authorized by the Memorandum to be the maximum amount of share capital
2. Issued Capital
The part of authorized capital which is offered by the company for subscription
3. Subscribed Capital
The part of issued capital which is subscribed by members of a company (Nominal value of
shares taken up by the members)
4. Called up Capital
The part of capital which is called for payment.
5. Paid up capital
Total amount paid on the shares subscribed by members (Called up minus calls in arrears)

SHARES
Share means a share in the share capital of a Company and includes stock. [Section 2(84)]
1. Share is an interest in a Company.
2. It bestows certain rights and obligations on the holders.
3. They are transferable in the manner provided in the Articles.
4. Shares shall be numbered.

Types of Share Capital

1. Equity share capital - Share capital which is not preference share capital
(a) with voting rights
(b) with differential voting rights/dividend
2. Preference share capital - Share capital which carries a preferential right with respect to
(a) payment of dividend for a running company
(b) repayment of paid-up capital in case of winding up
It is also entitled to receive dividend and surplus on winding up payable to equity shareholders.

MEMORANDUM OF ASSOCIATION
MoA of a Company is its charter/constitution. It defines the objects for which the
company is formed, the activities it can engage in and the powers it can exercise.

It is a public document under Section 399 of the Companies Act. It enables the shareholders,
creditors and others dealing with the company to know the scope of its activities and the
extent of powers it can exercise, based on which they can deal with the company.

MoA cannot contain anything contrary to the provisions of Companies Act. If it does, the
same shall be void.

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A Company cannot depart from the provisions contained in MoA. If it does, it would be ultra
vires of the company and void.

Forms for different types of companies (Schedule I of Companies Act)

Table A Form for company limited by shares
Table B Form for company limited by guarantee without share capital
Table C Form for company limited by guarantee with share capital
Table D Form for unlimited company
Table E Form for unlimited company with share capital

Contents of Memorandum (Section 4)

(a) Name clause.
Name of company with the last word – Ltd / Pvt Ltd.
This is not applicable for Section 8 companies.
Govt companies’ name must end with the word Limited.
In case of OPC, it should be included below its name.
(b) Registered Office clause
(c) Object clause
If there is any change in the activity which is not reflected in the name of the company, it shall
change the name within six months from the change of activities.
(d) Liability clause
It should be mentioned whether the company is limited or unlimited and also state liability of
members in the case of company limited by shares and limited by guarantee.
(e) Capital clause
The amount of authorized capital divided into shares of fixed amounts and the no of shares
with subscribers to the MoA.
(f) Association clause
This contains the no of shares taken by each subscriber to the MoA and name of nominee in
case of OPC.
In addition to the above compulsory clauses, MoA may contain other provisions like rights
attached to each type of share, etc.

MoA must be printed, numbered consecutively and signed by at least the minimum number
of subscribers required for each type of company (1 for OPC, 2 for Pvt Co and 7 for Public
Co) in the presence of at least one witness.
A Company, being a legal person, can subscribe to the memorandum through its agents.
A Minor cannot be a subscriber as he is not competent to contract.

Doctrine of ultra vires

A Company can depart from its objects stated in the MoA, only to the extent permitted by
Companies Act.
Any act done or contract made by the Company, which though legal in itself, not
authorized by the object clause of the MoA, is said to be ultra vires of the Company.

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Ultra vires means “beyond their powers” or acts done in excess of the legal powers of
the doers.
Since MoA is a public document, it is open to the public for inspection, and those who deal
with the Company are deemed to know about the activities and powers of the Company.

Impact of ultra vires acts

1. It is wholly void and inoperative in law
2. Not binding on the Company
3. Company can neither sue or be sued on such transactions
4. Company can be restrained from employing funds received through an ultra vires
transaction, if it is not spent
5. If a loan has been used for meeting lawful debt, the lender can exercise the rights of creditor
6. Ultra vires acts cannot be ratified by Shareholders
7. Shareholders can ratify if the act is beyond the powers of the directors or acted within its
powers but done irregularly.
8. Acts ultra vires to Articles can be ratified by altering the Articles by a Special Resolution in
the general meeting.
9. An ultra vires act cannot become intra vires by ratification, estoppel, delay, lapse of time etc.

Disadvantages
1. It prevents the company from changing its activities, in a direction which is agreed by all.
2. The object clause can be easily altered by passing a special resolution.

ARTICLES OF ASSOCIATION
Articles of a Company are the Company’s rules and regulations, framed to manage its
internal affairs.
It is the bye-laws of the Company, according to which directors and other officers are required
to perform their functions regarding the management of the Company.
The Articles is subsidiary to the Memorandum.

Contents of Articles (Section 5)

1. Regulations for management of the company
2. Matters prescribed under the Rules and additional matters considered necessary for its
management.
3. Provisions for entrenchment, to protect something, laying down conditions for altering
some of the provisions of Articles.
4. Manner of inclusion of entrenchment provision, either on formation of the company or
by amendment to the Articles, agreed by all members for a private company and by special
resolution for a public company.
5. Notice to the Registrar regarding entrenchment provisions.
6. Prescribed forms for Articles, specified in Tables F to J to Schedule I.
7. A Company may adopt all or any regulations contained in the model Articles

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8. For companies registered under this Act, regulations contained in model Articles apply
unless specified in the Articles.

Differences between Memorandum and Articles

1. Objectives: Memorandum defines the objectives of the company whereas Articles lays
down the rules for internal management.
2. Relationship: Memorandum defines the relationship of the company with outside world.
Articles defines the relationship with its members.
3. Alteration: Change in Memorandum requires permission as prescribed in the Act. Changes
can be made to Articles by passing a special resolution.
4. Ultra vires: Acts ultra vires to the Memorandum are void and cannot be ratified by
shareholders. Acts ultra vires to Articles can be ratified by special resolution, if they are within
the provisions of Memorandum.

DOCTRINE OF INDOOR MANAGEMENT

Doctrine of Constructive Notice
The Memorandum, Articles, and other related documents, filed with the Registrar of
Companies, are available for inspection to anyone, on payment of a nominal fee. Thus,
they become public documents under Section 399 of the Companies Act. Any person can
inspect such documents by electronic means, make a record of the same or get a copy or
extract. It is, therefore, the duty of every person dealing with a company, to inspect such
documents and ensure that his contract is in conformity with their provisions.
As access to such public documents is available, it is presumed / implied that all persons
have read and understood the contents of such documents. This presumed / implied
notice is called constructive notice.
If a person enters into a contract with a company, beyond its powers, he cannot acquire any
right against the company under the contract. This doctrine is to protect the company from
legal action by outsiders dealing with the company.

Doctrine of Indoor Management / Turquand Rule

This rule is an exception to the Doctrine of constructive notice. As outsiders do not have
notice of the internal affairs of a company, it is presumed that the Company has observed
all the formalities required for doing any act. This is called Doctrine of Indoor
Management or Turquand Rule. This is to protect outsiders dealing with the company.

Exceptions to the Doctrine of Indoor Management

(a) Actual or constructive knowledge of the irregularity
Any person who has knowledge of the irregularity does not get protection
(b) Suspicion of irregularity
It is the duty of outsiders to make necessary enquiries and clear any suspicion.
(c) Forgery
Doctrine of indoor management cannot apply to forgery, which is regarded as null.
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