COMPANY LAW

UNIT -1
 ( Meaning , definition, and characteristics of
company, different types of company ,
promotion , incorporation , and
commencement of business , document ,
Memorandum Of Association , Article Of
Association , prospectus and statement in
lieu of prospectus .)
Meaning

 A company, in its ordinary, non-technical

sense, means a body of individuals associated
for a common objective, which may be to carry
on business for gain or to engage in some
human activity for the benefit of the society.
Accordingly, the word ‘company’ is employed
to represent associations formed to carry on
some business for profit or to promote art,
science, education or to fulfill some charitable
purpose. This body of individuals may be
incorporated or unincorporated.
Definition

 The Companies Act 2013 of India

defines a company as-

 A business entity which acts as an

artificial legal person, formed by a legal person or a
group of legal persons to engage in or carry on
a business or industrial enterprise.
 According to the Companies Act, 1956, “A company is a
person, artificial, invisible, intangible, and existing only
in the contemplation of the law. Being a mere creature
of the law, it possesses only those properties which the
character of its creation confers upon it either expressly
or as incidental to its very existence.”
Characteristics of Company

1. Incorporated Association
 A company can be created only under the registration of the

Company Act.
 It comes into existence from the date when the certificate of

incorporation is issued.
 At least seven persons are required to form a public

company.
 At least two persons are required to form a private company.

 These persons will subscribe to the memorandum of

associations and also comply with the other legal

requirements of the Company Act in respect of registration
to form and incorporate the company, with or without
liability.
2. Artificial Legal Person

 A company can be considered as an artificial person

(a person who cannot act on his own will). It has to
act through a board of shareholders elected or
selected by the members of the company.
 The board of directors works as the only brain of the
company.
 It has the rights to acquire and dispose the
properties, to enter into contract with third parties in
its own name, and can sue and can be sued in its
own name.
 However, it cannot be considered as a citizen as it
cannot enjoy the rights of a citizen.
3. Separate Legal Entity

 A company is perceived to be a distinct legal entity and one that does

not depend on its members. The money credited by the creditors of
the company can be recovered only from the company and the
properties owned by the company.
 Individual members cannot be sued.
 Similarly, the company in any way is not liable for the individual
debts of the members.
 The properties of the company can only be used for the
development, betterment, maintenance, and welfare of the company
and cannot be used for personal benefits of the shareholders.
 A member cannot claim any ownership rights over the company
either single-handedly or jointly.
 The members of the company can enter into contracts with the
company in the same manner as any other individual can.
 The Income Tax Act also recognizes company as a separate legal
entity.
4. Perpetual Existence

 A company is said to be a stable form of

business organization.
 A company’s life does not depend upon the

death, insolvency or retirement of any or all

of its shareholders or directors.
 It is created by law and can only be dissolved

by law.
 Members can join or leave the company but

the company can continue forever.

5.Common Seal

 A company cannot sign documents by itself.

 It acts through natural persons who are called

its directors.
 A common seal is used with the name of the

company engraved on it as a substitute of its

signature.
 To be legally binding on the company, a

document has to carry the company seal on

it.
6. Limited Liability

 A company may be limited by shares or by

guarantee.
 In a company limited by shares, the liability

of members is limited to the unpaid value of

the shares.
 In a company limited by guarantee, the

liability of members is limited to such an

amount as the members may undertake to
contribute to the asset of the company in the
events of it being wound up.
7. Transferrable Shares

 The shares can be freely transferred in case of a

public company.
 The right to transfer shares is a statutory right and it
cannot be taken away by any provision.
 However, the manner in which such transfer of
shares is to be made should be provided and it may
also contain bona fide and reasonable restrictions on
the rights of members for transfer of their shares.
 However, in case of private companies, the article
shall restrict the rights of the members to transfer
their shares in companies with its statutory
description.
8. Delegated Management

 Any company can be considered as an autonomous,

self-governing and self-controlling organization.
 Due to the presence of a large number of members,
all members cannot take part in the management
of different affairs of the company.
 Control and management is therefore delegated to
the elected representatives called directors, who
are elected by the shareholders.
 The directors supervise the day-to-day work and
progress of the company.

Different Types of Companies
1.Types Of Companies Based On The
Mode of Incorporation/creation
Companies can be classified into three types
based on whether they are created by a special
act, special order, or are registered just like
any normal company.
Royal Chartered Companies
 Royal Chartered Companies are companies
created by the Royal Charter. This means they
are granted power or a right by the monarch
or by special order of a king or a queen.
Examples of Royal Chartered Companies are
East India Company, BBC, Bank of Japan, etc.
 Statutory Companies
 Statutory Companies are companies
incorporated by means of a special act
passed by the central or state legislature.
They are mostly invested with compulsory
powers and are responsible to carry out some
special business of national importance.
Some examples of statutory companies
are The Reserve Bank of India (formed under
RBI act, 1934), Life Insurance Corporation of
India (formed under LIC Act, 1956
Registered Or Incorporated Companies
 All the other companies which are
incorporated under the companies act
1956,2013 or any previous act passed by the
government come under this head. These
companies come under existence only after
they register themselves under the act and
the certificate of incorporation is passed by
the Registrar of companies.
2.Types Of Companies Based On The Number Of Members

Private Company sec 2(68).

 Private companies have more than 2 and less than 200 members and
their liability is limited or unlimited depending on the type of the
company it is. Unlike Public Limited companies, here the transfer of
shares is limited to its members and the general public cannot
subscribe to its shares and debentures. Pvt Ltd companies are
exempted from many rules and regulations which are applicable to
Public Limited companies. Also, it can start operations after receiving
just the certificate of incorporation, whereas a Public Limited
company needs a certificate of commencement as well. It is a great
option if you want the advantages of limited liability and yet want
greater control over your business and maintain its privacy. This is
the most popular type of company for start-ups to be registered as.
 R-restriction (shares), L-Limitation( 200 members), P-
Prohibition(public issue).
Public Company sec 2(71).
 The legal existence of a Public Company is separate
from its members (shareholders) and the liability of its
members is also limited. Its existence is thus not
affected by the retirement or death of its
shareholders. A minimum of 7 members is needed to
form a Public Limited company but there is no
maximum limit on this. The company collects its
capital by the sale of its shares to the shareholders.
The shareholders of a company do not have the right
to participate in the day-to-day management of the
company, thus separating ownership from
management. All the major decisions of the company
are taken by the Board of Directors.
One Person Company sec 2(62)
 One Person Company (OPC) as a company
type was introduced in the Companies Act of
2013 in India. It is similar to a sole
proprietorship but the owner shall have
limited liability and thus his personal assets
would not be at risk if losses need to be
recovered or if the company is liquidated.
3.Types Of Companies Based On The
Liability Of The Members
 In case of liquidation, the members of a
company can either be liable to pay even from
their personal assets or to the extent of the face
value of shares held by them. It all depends on
how the company is registered as. Companies
can be classified into three types based on the
liability of the members. These are –
Companies Limited By Shares,sec 2 (22)
 The liability of the shareholders is limited to the
extent of the face value of shares held by them.
Most Pvt Ltd companies are of this type.
Companies Limited By Guarantee,sec 2(21)
 In these companies, in case of liquidation, the
shareholders promise to pay a certain fixed
amount to cover the liabilities of the company.
Unlimited Companies, 2(92)
 There is no limit on the liability of the
shareholders. In case of liquidation, they might
have to pay even from their personal assets to
cover the liabilities of the company. This type of
company is quite uncommon today due to
obvious reasons.
5.Classification on the Basis of
Control
 On the basic of control, companies can be divided into:
1. Holding companies,sec 2(46)
2. Subsidiary companies,sec 2(87)

Holding and Subsidiary Companies

 Where a company has control over another company, it is

known as the Holding Company. The company over

which control is exercised is called the Subsidiary
Company. A company is deemed to be under the control
of another if:

 That other controls the composition of its Board of

Directors.
 The other company holds more than half in nominal value of its
equity share capital
(where a company had preference shareholders, before
commencement of this Act, enjoying voting rights with that of
equity shareholders, for the purpose of control, holding
company should enjoy more than half of the total voting power).

 It is a subsidiary of a third company which itself is a subsidiary

of the controlling company.

 For example, where company ‘B’ is a subsidiary of company ‘A’

and company ‘C’ is a
 subsidiary of company ‘B’, then company ‘C’ shall be a
subsidiary of company ‘A’.
 Thus, in order to be holding company, a
company must either control the composition
of the Board of Directors or hold more than
half of the nominal value of the equity share
capital of another company.
Classification on the Basis of
Ownership Notes
Government Company
 Section 2(45) defines a Government Company as “any
company in which not less than 51% of the paid-up share
capital is held by the Central Government, or by any State
Government or Governments, or partly by the Central
Government and partly by one or more State Governments
[and includes a company which is a subsidiary of a
Government Company”]. Is government company-
BHEL,SAIL,etc.

Non government company

Which are not owned and controlled by the central or any
state government are called non government companies.
Examples-public limited company
On the basis of national interest

Indian Company
The term Indian Company is defined under section 2 (20)
of the Companies Act 2013 as any company incorporated
under the provisions of the Companies Act 2013 or under
any other previous corporate law.

Foreign Company, sec 2(42)

Foreign Company is a company incorporated in a country
outside India and has a place of business in India.
However, where not less than 50% of the paid-up share
capital (whether equity or preference or partly equity and
partly preference) of a company incorporated outside India
and having an established place of business in India, is
held by one or more citizens of
India or by one or more Indian bodies
corporate, such company shall comply with
such of the provisions of the Act as may be
prescribed with regard to the business carried
on by it in India. Dominoz,pizza hut,BMW etc.
Other types of companies
Associate Company
The term Associate Company is defined
under section 2 (6) of the Companies Act
2013 as a company in which some other
company has a substantial influence,
however, the same is not termed as a
subsidiary company. Further, the concept of
Associate Company includes Joint Venture
Company as well.
Producer Company
The term Producer Company means a legally
recognised body of agriculturists and farmers
that aim to provide the following:
 Ensure Good Status to Members;
 Provide Support, Income, and Profitability to

Members;
 Improve the Standard of Living for Members
 All the members of a producer company must

compulsorily be a primary producer in nature.

Dormant Company
 The term Dormant Company means a company that is
formed and incorporated under the provisions of section 455
of the Companies Act 2013 for some future project or to hold
some property and asset, and the same has no significant
accounting transaction. Therefore, the members of such an
inactive or dormant company will furnish an application to
the Registrar for declaring that company as dormant.
 After being satisfied with the application filed, the registrar
will allow the status of dormant and will issue a certificate
regarding the same.
 Also, in the case where the company has not furnished its
annual return for a period of two years, then, in that case, the
same will be declared as dormant by the registrar.
Investment Company
 The term Investment Company is defined
under section 186 of the Companies Act
2013 as the company that has a fundamental
transaction or business pertaining to
securities offered by such an entity. Further,
the term securities mean the shares,
debentures, or any other security offered by
such a company.
Distinction between Private and Public Company

Following are the main points of distinction between a private and a

public company:
1.In the case of a private company, minimum number of
persons to form a company is two while it is seven in the case
of a public company.
2.In case of a private company the maximum number of
members must not exceed 200.whereas there is no such
restriction on the maximum number of members in case of a
public company.
3.In private company, the right to transfer shares is restricted,
whereas in case of public company the shares are freely
transferable.
4.A private company cannot issue a prospectus, while a public
company may, through Prospectus, invite the general public
to subscribe for its shares or debentures
. A private company can commence business immediately after
receiving the certificate of incorporation, while a public company
can commence business only when it receives a certificate to
commence business from the Registrar.
 A private company need not hold a statutory meeting but a
public company must hold a statutory meeting and file a
statutory report with the Registrar.
 The directors of a private company are not required to file with
the Registrar written
 Consent to act as directors or sign the memorandum of
association or enter into a contract for their qualification shares.
But the directors of a public company must file with the Registrar
their written consent to act as directors, must sign the
memorandum and must enter into a contract for their
qualification shares
 Directors of a private company are not
required to retire by rotation, but in case of a
public company, at least two-third of the
directors must retire by rotation.
 The number of directors in a private company

may be increased to any extent without the

permission of the Central Government, but in
case of a public company if the number of
directors is to be more than twelve, then the
approval of the Central Government is
necessary.
 Two members have to be personally present
to form the quorum in a private company but
in a public company this number is five
members.
 In a private company, there are no

restrictions on managerial remuneration.

 In addition to the above, a private company

enjoys some special privileges. A public

 Company enjoys no such privileges.
Following are the special privileges available to a private company:

 A private company can be formed with only two

members [s.12 (1)].

 A private company can proceed to allot shares

without waiting for the minimum subscription (s.69).
The reason is that a private company is not required
to offer shares to the public.

 A private company is not required to issue a

prospectus. Therefore, it can allot shares without
issuing a prospectus or delivering to the Registrar a
statement in lieu of prospectus [s.70 (3)].
 A private company need not offer further issue of shares
to the existing shareholders, i.e., a private company is
free to allot new issue to outsiders [s.81(3)].

 A private company can issue any kind of shares and

allow disproportionate voting rights since Ss. 85 to 89 of
the Act are not applicable to it. [s.90(2)].

 A private company can commence business immediately

after its incorporation [s.149 (7)].

 It need not have an index of members [s.151 (1)].

 A private company is not required to hold a
statutory meeting or to file a statutory report with
the Registrar of Companies [s.165 (10)].
 Only two members, who are personally present at
the meeting, shall form the quorum unless the
articles provide for a larger number [s.174 (1)].
 In case of a private company, poll can be
demanded by one person present in person or by
proxy, if not more than seven persons are present;
if the number present is more than seven, two
members present in person or by proxy can
demand a poll [s.179 (1) (b)].
 A private company need have a minimum of two
directors only [s.252 (2)].
 All the directors may be appointed by a single resolution.

 The directors of a private company need not file their

written consent to act as directors or to take up their
qualification share (Ss.264 & 266).

 The directors of a private company need not retire by

rotation (s.255).

 Section 266 dealing with restrictions on appointment or

advertisement of directors is not applicable to a private
company [s.266 (5) (b)].
 Where a new director is to be appointed, a
special notice of fourteen days is required. This
provision is not applicable to a private company,
unless it is a subsidiary of a public company
[s.257 (2)].

 Directors of a private company can vote on a

contract in which they are interested (s.300).

 A private company is exempted from restrictions

regarding managerial remuneration.
Loss of Privileges by a Private Company

 Section 43 provides that if a private company contravenes

any of the three conditions included in its Articles as per
s.3(1) (iii), then it will be treated as if it is a public company
and it will then result in loss of privileges and exemptions to
which it is normally entitled to.

 The provision to s.43 states that if the contravention of any

of the three restrictions contained in the articles was
accidental, or if the Central Government is satisfied that it is
just and equitable to grant relief, it may relieve the company
from these consequences on the application by the company
or any other interested person.
Conversion of a Private Company into a Public Company

 Section 44 provides for conversion of a private

company into a public company. The
procedure is:
 The company in general meeting must pass a
special resolution altering its articles in such a
manner that they no longer include the provisions
of s.3(1) (iii) which are required to be included in
the articles of a private company. On the date of
the passing of the resolution, the company ceases
to be a private company and becomes a public
company.
 Within thirty days of the passing of the special
resolution altering the articles, the company
shall file with the Registrar (i) a printed or
type-written copy of the special resolution and
(ii) a prospectus or a statement in lieu of
prospectus.
 If default is made in filing the resolution and
the prospectus or the statement in lieu of
 prospectus, the company and every officer in
default shall be liable to a fine up to 5,000 for
every day of default.
 If the number of members is below seven,
steps should be taken to increase it to at
least seven whilst the number of directors
should be increased to at least three, if there
are only two directors.

 The word ‘Private’ is to be deleted before the

word ‘Limited’ in the name.
Conversion of Public Company into a Private Company

 There is no direct or express provision in the Act for the

conversion of a public company into a private company
except a reference in the provision to s.31(1). A public
company having a share capital and membership within
the limits imposed upon private companies by s.3(1) (iii),
may become a private company by following the
procedure as given below:
 The company in general meeting has to pass special
resolution for altering the articles so as to include therein
the necessary restrictions, limitations and prohibitions
and to delete any provision inconsistent with the
restrictions. For instance, a private company has to put
certain restrictions on the right of members to transfer
their shares.
THANK YOU