UNIT-I: INTRODUCTION &

CONCEPT

- Namratha,
Assistant Professor,
BMSCL.
History and development of the
concept of Company Law
 Pre- Independence:
 Joint Stock Companies Act, 1850
(British company Legislation Act, 1844)
Joint Stock Companies Act, 1857
Joint Stock Companies Act, 1860
Joint Stock Companies Act, 1866
Joint Stock Companies Act, 1882
Indian Companies Act, 1913 (British
Company Act, 1908)
Indian Companies Act, 1936
 Post Independence:
 Companies Act, 1956
(1950) HC Bhabha Committee
Constituted
(1952) submitted report on New
Companies Act
Indian Companies Act, 1956-
1/4/1956
based on English Companies Act
of 1948
658 sections & 15 schedules
 Companies Act, 2013
 Company Bill 2012-
 Loksabha : (18th Dec, 2012)
 Rajya Sabha :(08th Aug, 2013)
 Presidential assent: (29th Aug,
2013)
 notified in Official Gazette on 30 th
Aug, 2013
 Finally implemented:
(September, 2013)
 470 Sections, 7 schedules- Companies
Act, 2013
 One Person Company, Corporate
Social Responsibility
 National Company Law Tribunal-
Companies Act, 2013
 Company Law Board- Companies Act,
1956
 max no of members –private
companies
Independent Director
 Resident Director
 Women Director
 An association of both natural &
artificial persons
 incorporated under the existing
law of a country.

 Sec 2(20) of Companies Act, 2013-

“ a company means a company
incorporated under this Act or under
any previous company law”.
Nature and Characteristics of a Company

 Advantages:
1. Independent Corporate existence
• independent person
• legal person
• incorporated company- own name, property, liability,
etc.
• members are different from the company
 Saloman v. saloman and co Ltd
• For Some years saloman had carried on a prosperous
business of leather merchant & boot manufacturer.
• He formed a Limited company called as Salomon &
co Ltd to take over his Boot business, consisting of
himself, his wife, his daughter & his four sons as a
shareholders.
• Saloman held all the shares except one share each
of one pound by his wife, daughter & four sons.
• Board of director consists of saloman as Managing
director and his 2 sons as directors
• Through resolution of Board of directors, Saloman’s
personal business was transferred to Saloman & Co
Ltd at an agreed value of 40,000 pounds.
• Saloman was allotted 20,000 shares of one each and
debentures worth 10,000 pounds with the charge of assets of a
company and balance in cash as consideration for transfer of
business.
• Within a year of incorporation, owing to general trade
depression company had to be wound up.
• On the date of winding up, companies position was as follows:
 Total Assets -
6,000 pounds
Total Liabilities -
Debentures:
Secured creditors (Amt due to saloman) - 10,000
pounds
Unsecured creditors (Other creditors) - 7,000
pounds
• In a Suit filed , it was argued on behalf of unsecured
creditors that-
 Saloman and Saloman co Ltd were one and the
same.
 The company was the mere agent of saloman.
So, the unsecured creditors should be paid in
priority to saloman.

 Held that company was in the eyes of law, a

separate distinct legal entity from saloman and it
was not a agent of saloman.
 So, as to secured creditors, saloman was entitled to
repayment of his debt in priority to other unsecured
creditors.
 Lee v. Lee’s Air Farming Co Ltd
• Lee incorporated a company of which he was the
managing director.
• In that capacity he appointed himself as a pilot of the
company.
• While on business of the company he was lost in a
flying accident.
• His widow claimed compensation.
• In this case, it was argued that, Lee was a managing
director and the business belong to him, so she is not
entitled to claim any compensation.
• But Court held that, Compensation shall be given.
 Dhulia –Amalner Motor Transport Ltd v.
Raychand Rupsi Dharamsi
• Partnership firm was carrying on the business of plying
buses.
• While the partnership was still a running concern, some of
the partners formed a private limited company.
• The partners who formed a company sold the buses which
were owned by them to the company which were being used
by the firm.
• remaining partners who did not join the company and were
in minority sued the company claiming their share in the
profits on the ground that in reality the company was not
different from the firm as the business carried on by it was
the same as that of the partnership.
But Bombay HC rejected the contention of the
petitioners and held that, they had no right to sue for
share of profits from the company’s business because
the company was altogether a third person and its
entity was different from those of its shareholders.
2. Perpetual succession
• Continuous existence
• members may come & go , but company never dies.

3. Separate Property
• Legal person- It can own, enjoy, dispose of the property
 Macaura v. North Assurance Co Ltd
• A person had a timber business, formed a company and transferred
his business to that company.
• He took 99% shares and remaining 1% of the shares were taken by
other people.
• He insured timber in his name.
• Loss suffered to the timber in the future days and he asked for the
compensation from the Insurance company.

Here, he could not claim the insurance because all the timbers were
insured in his name and not in the name of the company though he
had transferred his property to company and claimed 99 % shares.
 That is, member doesn’t even have insurable interest in the
property of the company. Hence, insurance Company is not liable to
him.
4. Capacity to sue & be sued
• To institute legal proceedings against the company in its own
name.
• Similarly, Company may bring an action against anyone in its
own name.
5. Transferable shares
6. Limited Liability
7. Professional management
8. Finance
 Disadvantages:
1. Lifting of Corporate Veil
• Theory of corporate entity of a company is still the basic
principle on which the whole law of corporations is based.
• But the separate personality of the company, being a
statutory privilege, it must always be used for legitimate
business purposes only.
• Where the legal entity of a corporate body is misused for
fraudulent and dishonest purposes, the individuals concerned
will not be allowed to take shelter behind the corporate
personality.
• In such cases, the Court will break through the corporate
shell and apply the principle of what is known as “ lifting or
piercing the corporate veil”.
• That is, Court will look behind the corporate entity.
Circumstances under which corporate veil can be lifted:

I) Under Judicial Provisions:

a) To determine the character of the company
• Sometimes it becomes necessary to determine the character of a
company.
• To see whether the company is real and companies affairs are properly
controlled or not, it is essential to determine the nature of a company.
• The function of the company should be in accordance with nation’s
interest.
• If any signs of enemy character are shown in the company, then the
court can interfere and can lift the corporate veil and can say company
and its members are one and the same.
 Daimler co. Ltd v. Continental Tyre & Rubber Co. Ltd
• A Company was incorporated in England for the purpose of
selling in England tyres made by Germany, by a German
company.
• All the directors of this company were German resident in
Germany.
• During the First World War, the English Company
commenced an action for the recovery of a debt to it would
amount to trading with the enemy and therefore the company
was not allowed to proceed with the action.
 Tyre & Rubber
Mfg Co.
German [German
Citizens Company]
[incorporated in
World Germany]
War-I
Daimler Co Ltd Continental Tyre
[German & Rubber
Company] Company Ltd
[Incorporated in [England
England] Company]
 People’s pleasure park company v. Rohleder
• It was held that the courts may refuse to pierce the corporate veil
where there is no danger to public interest.
• In this case, certain lands were transferred by an Englishman to
another perpetually restraining the transferee from selling the said
property to coloured persons .i.e., Negroes.
• However, the transferee transferred the land to a company which was
exclusively composed of Negoroes.
• Thereupon, the petitioners brought an action against the company for
annulment of the conveyance on the ground of breach of condition.
• Rejecting the contention of the petitioners the Court held that
members individually or collectively are not the corporation, which has
a distinct legal existence, quite independent and separate from that of
its members.
b. Benefit of Revenue:
• In fact registration of a company is intended for the tax
benefits.
• Every country gives certain tax benefits to the companies.
• However, some persons in a company try to evade from
paying taxes.
• Therefore, to prevent tax evasion, the corporate veil may be
lifted by the court.
Dinshaw manekjee petit re Case
• Assessee was a wealthy man enjoying large dividend and
interest income.
• He formed four private companies and agreed with each to hold
a block of investment as an agent for it.
• Income received was credited in the accounts of the company
but the company handed back the amount to him as a
pretended loan.
• In this way he divided his income in four parts in a bid to
reduce his tax liability.
• The Court came to a conclusion that if any business is been
started just as a legal entity and that business does not do any
kind of transaction, then the veil can be lifted to find out who is
controlling the company and why is he controlling it.
• If the Court comes to a conclusion that the company is started
just to avoid taxes then necessary actions can be taken.
 Bacha F. Guzdar v. Commissioner of Income Tax,
Bombay
• Agricultural income was exempt from tax under the Income tax Act.
• The income of a Tea company was exempt to the extent of 60% as
Agricultural Income and 40% was taxed as income from manufacture
& sale of tea.
• The plaintiff , a member of the tea company received certain amount
as dividend in respect of shares held by her in the company.
• She claimed that 60% of her dividend income should be exempt from
the Income tax being an agricultural income.
• The SC rejected the argument of the plaintiff and held although the
income in the hands of the company was partly agricultural, yet the
same income when received by the shareholders as dividend could
not be regarded as agricultural.
c. Fraud or improper conduct:
• Some persons create a company with an intention to cheat
the opposite parties and to avoid legal obligation.
• When the fraud is appeared on the face of the company, the
court will interfere and decide the company as improper and
it will apply the principle of lifting of corporate veil.
• Company is a legal person, but it is incapable of committing
fraud.
• So, when a case is been registered against a company, then
the court will consider company as well as the Directors to be
one and the same in order to find out who has committed the
fraud.
Gilford Motor Co Ltd v. Horne
• Horne was appointed as the managing director of the
plaintiff company on the condition that, he should not
solicit or entice away the customers of the company
either at the time he holds the office or afterwards.
• Horne’s employment was terminated.
• Thereafter he started a new company which solicited
the plaintiff’s customers.
• Court held that, defendant company was a channel
used by the defendant (Horne) to obtain advantage of
the customers of the plaintiff company for his own
benefit and it shall be restrained from carrying on the
business.
 P.N.B. Finance ltd v. Sheethal Prasad
Jain
• Sheethal Prasad Jain was a Financial Advisor of PNB
Finance and he has taken a loan of 15,00,000 to
purchase property in Delhi.
• Instead, he started three different companies along
with his son Mukul Jain and the company purchased a
property.
• PNB Finance filed a case against Sheethal Prasad to
recover the loan money.
• And when the case was been filed, corporate veil of
three companies was been lifted
• Court came to a conclusion that company belongs to
Sheethal Prasad and so it asked the company property
to be sold and to clear the debt.
D) Government Company
Som Prakash Rekhi v. Union Of India
• Wherein the assets and business of Burma Shell was acquired and
vested in the Central Govt.
• The aggrieved employee, who had certain rights as to Provident Fund,
etc. against the former company, claimed them against the Govt by
means of writ.
• His plea was resisted on the plea that the undertaking had been vested
to a Company which was registered under the Companies Act and
therefore the question of writ against private company could not arise.
• But rejecting this contention Court held that since whole undertaking
had been vested in the Central Govt, it had become a State
undertaking. Law should not go by the fact whether the company is
registered under the Companies Act or otherwise, but by the nature of
the functions which the undertaking was performed.
E) Agency and Trustee
• Sometimes, a company acts as an agent or trustee of its
members or of another company.
• In such cases, the court may lift the corporate veil and the
principal (i.e; for whom the company acts) may be held liable for
the acts of the company.
 F.G Films Ltd Re
• An American company produced a film in India technically in the
name of a British Company, 90% of whose capital was held by the
President of the American Company which financed the
production of the film.
• Board of Trade refused to register a film as a British film which
stated that English company acted merely as the nominee of the
American company.
FG Films Ltd
[American
Company] India

Company
incorporated in
England
[British Company]
II. UNDER STATUTORY PROVISIONS: [Personal liability of
Directors and members]
a)Non-Fulfilling the requirement of incorporation (sec
464)
• When Company gets incorporated, there are some
conditions imposed by the companies Act and the
company should follow it.
• In case, the company does not follow then, Directors
become personally liable to pay the loss.
• For example: When the company is going into a loss or
about to wind up, then they cannot do any kind of
business, if any business is been done, then the
directors become responsible.
b) Mis discription of name (sec 12) :
• Where in any act or contract of a company, its name is
not fully or properly indicated, those who have
actually done the act or made the contract shall be
personally liable for it.
 Hendon v Adelman
• In this case, directors were held personally liable on a
cheque signed by them in the name of a company
stating the company’s name as “LR Agencies Ltd”, the
real name being “L & R Agencies Ltd”.
c. Fraudulent conduct of business (sec 339)
• Sec 339 imposes liability for fraudulent conduct of a
company’s business.
• Sec 339 says that- If in the course of winding up of a
company, it appears that any business of the company has
been carried on with intent to defraud creditors of the
company or any other persons, or for any fraudulent purpose.
• Those who were knowingly parties to such conduct of
business may, in the discretion of the tribunal, be made
personally liable for all or any of the debts of the company.
d. Holding & subsidiary company [sec 2(46) & (87)]
• Holding Company is called as a parent company and the subsidiary
company is called as a child company.
• As per companies Act, both are separate and they have a
individual existence.
• The income of one company cannot be adjusted to another
company.
• But this individual identity will be removed by applying the lifting
of corporate veil, when the company has to provide the profit
earned or to show the income of not only the company, but also its
associated company.
• And the veil can be lifted to find out whether the holding company
just to avoid the taxes is investing its money with any subsidiary.
2. Formality & expenses
• Incorpoartion is a very expensive affair and require a
number of formalities to be complied with.
• The administration of a company has to be carried on
strictly in accordance with the provisions of the Act.
• General Meetings must be held in time; accounts must be
prepared and audited and then presented to the
shareholders in general meetings; copies of accounts are to
be filed with the registrars, mortgages and charges and
certain resolutions have to be registered with the Registrar
and in many other ways companies are under government
control and regulation.
• Returns have to be filed with the registrar and every failure
is penalized.
3. Company is not a citizen
• A company is a legal person, is not a citizen either under the
constitution of India or under the Citizenship Act.
• A company is, however, a person in the eyes of law and it
can claim the protection of such Fundamental Rights as are
guaranteed to all persons whether citizens or not.
• But, a company cannot claim the protection of such
Fundamental Rights as are expressly guaranteed to citizens
only.
 KINDS OF COMPANIES
1. Private companies: sec 2(68)
Sec 2(68)- Private company means a company which in
its AOA contains following restrictions:
a.Minimum paid up capital:
The company has a minimum paid-up capital of one lakh
rupees or such higher amount as may be prescribed [This
requirement has now been deleted]
b. Restriction on number of members:
• The number of its members must be limited to 200 except in
the case of OPC.
• Where 2 or more persons hold one or more shares jointly,
they are treated as a single member.
• Persons who are in the employment of the company are
excluded from the limitation of 200.
• This number (200) is exclusive of persons who having been
formerly in the employment of the company were members
of the company while in that employment and have
continued to be members after the employment ceased, shall
not be included in the number of members.
c. Restriction on transferability of shares:
• There must be some restrictions on the right of its members
to transfer their shares in the company.
d. Restriction on issue of prospectus:
• The company must prohibit any invitation to the public to
subscribe for any shares in or debentures of the company.
• Company should prohibit any invitation or acceptance of
deposits from persons other than its members, directors or
their relatives.
Private company must compulsorily have AOA.
 Word “private ltd” shall be added at the end of the
name.
 minimum two subscribers
 only two directors-
• appointed through single resolution
• Permanent life directors- retirement by rotation does
not apply
 Conversion of private company into public company
1.Conversion by default
• Conversion of a private company into public can happen
through default which means, in case a company does not
follow the rules which are provided under the AOA and they
try to over ride the provisions of the companies Act, then
they are compelled to convert themselves into a public
company.
• When a default is made in complying with any of those
provisions, the company shall cease to be entitled to the
previleges and exemptions conferred by or under the Act.
• Then the whole of the Act would then apply to the company
as if it were not a private company.
2. Conversion by Choice:
• A private company may of its own choice become a
public company
• It may at any time pass a special resolution, deleting
the requirements under sec 2(68) from its AOA and
then from the date of alteration, it becomes a public
company.
• Then, within 30 days issuing prospectus and all other
requirements of the Act should be complied with, such
as, increasing the number of shareholders and
directors to the statutory minimum.
2. Public company- sec 2(71)
• Means company which is not private company
• Minimum paid-up share capital is 5 lakh rupees or such
higher paid up capital as may be prescribes [ But this
provision is now omitted]
• Subsidiary of Public co is a public company.
• Minimum number of members is 7 & maximum is
unlimited
• shares are freely transferable
• minimum three directors, maximum 15 directors
• More than 15 directors- require special resolution.
 Appointment of women director: sec 149(1)-
• every listed company and every other public company
having-
a. paid-up share capital of 100 crore rupees or more; or
b. Turnover of 300 crore rupees or more
• are mandated to have at least one women director.
 Appointment of Independent Director: Sec 149(4)-
• every listed public company shall have at least one-third of
the total number of directors as Independent directors.
• And Central Govt has prescribed the public companies
having paid up share capital of ten crore rupees or more or
turnover of one hundred crore rupees or more or in
aggregate, outstanding loans, debentures and deposits,
exceeding 50 crore rupees- to have at least 2 directors as
independent directors in the Board of Directors of the
company.
Conversion of public company into private company
• AOA shall be altered in order to include requirements of
the private co.
• must be approved by tribunal
• Altered copy of AOA along with order copy of tribunal-
file with the Registrar of Companies within 15 days.
3. Holding and subsidiary company
• Co which controls any other company- the controlling co is
holding co.
• Controlled co is called subsidiary co.
• Holding company can invest/ buy shares/ debentures of
subsidiary company.
• A company is said to have control over another in the following
cases:
a. One co controls the composition of board of Directors of the
other- appoint and remove majority of directors
b. One co holds majority of shares in another company- more than
half of the voting power.
c. where the holding company’s subsidiary has its own subsidiary,
it becomes the subsidiary of the first mentioned company.
4. Government Company (Sec 2(45)
• Any Company in which not less than 51% of the paid
up share capital is held by the central Govt or by state
govt or partly by Central Govt & partly by one or more
state govt and also includes a company which is the
subsidiary of such a government company.
• Auditor of a Govt Co shall be appointed /re-appointed
by the Comptroller & Auditor General (C & AG)
• C &AG of India also have power to direct-
manner in which the accounts of the company shall be
audited
 give instructions to the auditor relating to
performance of his functions.
• Report submitted to C & AG – right to comment upon
or supplement the report.
• Such comments/supplements along with the audit
report- placed before the AGM.
• If Central Govt is the member of the Govt company, it
is the duty of the Central Govt to prepare an annual
report on the working and affairs of the company.
• report must be ready within 3 months of the AGM
before which the audit report is placed.
• Report shall be placed before both the house of the
parliament- with audit report /comment of the C & AG.
• Where in addition to the Central Govt, a State Govt is
also a member of the company, the state govt shall lay
the same report before the state legislature.
• Where Central Govt is not a member, every state govt
which is member shall have to prepare an annual
report within the same time & then as soon as possible
lay it before the state legislature.
• Appointment of more than 15 directors- without
special resolution.
• AGM- called during business hours- any day which is
not a National holiday- held either at the registered
office of the company or at some other place as the
central govt may approve in this behalf.
5. LIMITED COMPANY
SEC 3(2)- A COMPANY FORMED UNDER THIS ACT MAY BE
EITHER:
a.Company Limited by Shares
b. Company Limited by Guarantee
c. Unlimited Company
a. Companies limited by shares:
A company that has the liability of its members limited by the
liability clause in the memorandum to the amount, if any,
unpaid on the shares respectively held by them is termed as a
company limited by shares.
Section 2(22) of the Companies Act, 2013 provides that
“Company limited by shares” means a company having the
liability of its members limited by the memorandum to the
amount, if any, unpaid on the shares respectively held by them.
 For example, a shareholder who has paid Rs.75 on a share of
face value Rupees 100 can be called upon to pay the balance of
Rupees.25 only.
Companies limited by shares are by far the most common and
it may be either public or private.
b. Companies limited by guarantee:
Section 2(21) of the Companies Act, 2013 provides that –
a company that has the liability of its members
limited to such amount as the members may
respectively undertake, by the memorandum, to
contribute to the assets of the company in the event
of its being wound-up, is known as a company limited
by guarantee.
 The liability of the members of a guarantee company
is limited by a fixed sum which is specified in the
memorandum & beyond which they cannot be called
upon to contribute.
• The memorandum of a company limited by guarantee
has to state that each member undertakes to
contribute to the assets of the company in the event
of its being wound up, for payment of the debts and
liabilities of the company, such amount as may be
required not exceeding a specified amount.
• The members of a guarantee company are, in effect,
placed in the position of guarantors of the company’s
debts up to the agreed amount. The members is liable
to the company and to any other person.
c. Unlimited Companies:
 In this type of company, the liability of members of
the company is unlimited.

Section 2(92) of the Companies Act, 2013 provides

that unlimited company means a company not having
any limit on the liability of its members.
6. Associate Company-
Under section 2(6) of the Companies Act, 2013, “associate company”, in
relation to another company, means
• a company in which that other company has a significant influence, but
which is not a subsidiary company of the company having such influence
and includes a joint venture company.
 For the purpose of “significant Influence”, the following conditions need to
be fulfilled:
• (i) Control of at least 20% of total voting power but less than 50% of Share
Capital by another company.
• (ii) Control of or participation in business decisions under an agreement.
 i) Paid up share capital does not exceed four
crore Rupees or such higher amount as may be
prescribed which shall not be more than ten crore
rupees
7. Small Company:

ii) Turnover of which as per profit & loss account

for the immediately preceeding financial year
does not exceed fifty crore rupees or such higher
amount as may be prescribed which shall not be
more than one hundred crore rupees.
• Not applicable to-
A) a holding company or a subsidiary company;
(B) a company registered under Section 8; or
(C) a company or body corporate governed by any
special Act.
8. Foreign company (Sec 2(42)
• Any Company or body corporate incorporated outside India
which-
 has a place of business in India whether by itself or through
an agent, physically or through electronic mode ; and
 Conducts any business activity in India in any other manner.
Documents to be filed:
• A foreign company has to furnish to the Registrar the following
documents within 30 days.
 a certified copy of the charter, statutes or MOA & AOA or any
instruments containing the constitution of the company. If the instrument
is not in English language, a certified translation of it will have to be filed.
 Full address of the registered/ principal office of the company abroad.
 a list of the directors and secretary of the company containing
prescribed particulars.
 the name & address of one or more persons resident in India,
authorised to accept on behalf of the company service of process and any
notices or other documents required to be served on the company.
 full address of the company in India which is to be deemed its
principal place of business in India.
 declaration that none of the directors of the company or
authorized representatives in India has ever been convicted or
debarred from formation of companies & management in India or
abroad.

 When any changes occurred to the above particulars, the Registrar

must be notified accordingly.
 Such documents have to be filed with the Registrar of the State
where the principal place of business is situated.
 If the company establishes any branch or branches of its business
in India, no further information need to be given, except that with
the annual accounts the company should deliver three copies of a
list of all its place of business in India and with reference to which
the accounts are made out.
 Display of Name:
 The company shall conspicuously exhibit on the outside of every office or
place of business its name and the country of incorporation in English
character & in the regional language.
 The name and the country of incorporation should also appear in English on
all business letters, bill-heads and letters and all notices and other official
publications of the company.
 The statement must also indicate whether the liability of the members is
limited .
 If the liability of the member is limited, the notice of this fact must be
mentioned in every prospectus/ business letters/ bill-heads, etc in legible
English characters and must be conspicuously exhibited on the outside of
every office, or place where it carries on business in India, in legible English
characters & also in legible characters of the language or one of the
languages in general use in the locality in which the office or place is
situated.
 A failure to comply with the above provisions does not
affect the validity of contract made by a foreign company, but
the company shall not be entitled to bring any suit, claim any
set-off, make any counter- claim or institute any legal
proceeding in respect of any such contract until it has
complied with all the provisions of the Act relating to the
foreign company.
9. One Person Company- Sec 2(62)
• Only one person as a member.
• MOA must state the name of some other person with
his prior written consent
• that person becomes the member in the event of
death of the subscriber or his incapacity to contract.
• Written statement – to be filed with registrar.
• One person member of the company may at any time
substitute such person with another person by giving
notice
• Only one director is compulsory for such company.
• The requirement is that, every company has to have
at least one director who has stayed in India for a total
period of not less than 182 days in previous calendar
year would have to be complied with by one person
himself or in the alternative he may have to keep
another person as a director for such compliance.
10. Company with charitable objects (Sec 8 )[Company not for
profit]:
• has object of promotion of commerce, science, sports, education,
research, social welfare, charity, protection of environment, etc.
• It intends to apply its profits if any or other income for the purpose
of promoting its objects
• It intends to prohibit dividend to its members

 Govt may give it a license allowing it to be registered as a limited

company without using the word “limited” or “private Limited” as a
part of its name.
 Then registrar has to be approached with a prescribed form so that
he may register the company as charitable institution
 The company will enjoy all the privileges of the limited
company and also subject to the obligations of such
companies.
 A partnership firm may be a member of such company.
 A company so registered is not to alter the MOA & AOA
except with the previous approval of the Central Government.
 Such company may convert itself into a company of any
other kind only after complying with prescribed conditions.
 Any other kind of company which satisfies the requirement
may come under the section, subject to conditions, etc that
may be imposed by Central Govt.
 If company does not comply with the requirements, the
Central Govt may deprive the license of the Company. But
reasonable opportunity of hearing has to be given to the
company. A copy of the order has to be served on the
registrar.
 After the revocation of license, the Central Govt may order
winding up of the company if it is necessary in the public
interest or order its merger with another company registered
as charitable company. Here also opportunity of being heard
has to be given to the company.
 Promoters
• Before a company is formed, there must be some persons who
have an intention to form it & take necessary steps to bring it
into existence.
• The persons who initiate the process of formation of a company
are called ‘Promoters’.
• not only conceive ideas- but also take necessary steps to
complete the formalities of incorporation & registration and also
make arrangement for capital/assets with which the company is
to be started.
 DEFINITION OF PROMOTER
 Sec 2(69) of companies Act, 2013- ‘Promoter’
• who has been named as such in the prospectus or is identified
by the company in the annual return referred to in sec 92; or
• who has control over the affairs of the company, directly or
indirectly whether as share-holder, director or otherwise; or
• in accordance with whose advice, directions or instructions the
board of directors of the company is accustomed to act:
 not applicable to person who is acting merely in a professional
capacity.
 Legal position of a promoter:
 Fiduciary position
 trustee
 Rights of a promoter:
 Right to receive preliminary expenses
• The promoters are entitled to receive all the expenses incurred in
setting up and registering the company from the Board of Directors.
• The AOA may provide for payment of preliminary expenses to the
promoters.
• The company may pay the expenses to the promoters even after its
formation but such payments should not be ultra vires the articles
of the company.
• The AOA may contain a provision regarding payment of a fixed sum
to the promoters.
• But such a provision has no contractual effect and the promoter
cannot sue the company for enforcement of payment on the
strength of the provision in the articles.
 Malhado v. Porto Alegre Railway Co
• Articles of the company contained a provision that the
company may make payment of the expenses incurred
for setting up the company to the promoters.
• The quantum of expenses to be paid depended on the
decision of the Board of Directors but it was not to
exceed 2000 pounds in any case.
• The plaintiffs were the promoters of the company who
sued it for enforcement of payment on the basis of the
articles.
• Court ruled that the promoters could not sue the
company for preliminary expenses as the company is
not bound by any provision in the articles except to
members in their capacity as members.
 Right to recover proportionate amount from the co-
promoters
• The promoters are held jointly and severally liable for
the secret profits made by them in formation of a
company.
• Therefore, if the entire amount of secret profits is
paid to the company by a single promoter, he is
entitled to recover the proportionate amount from his
co-promoter.
• Likewise, if the entire liability arising out of mis-
statement in the prospectus is borne by one of the
promoters, he is entitled to recover proportionately
from the co-promoters.
 Right to Remuneration
• A promoter having made proper disclosure, has a right to be paid
remuneration for his efforts.
• The payment of remuneration to a promoter in consideration of his
services may be in the form of fully or partly paid-up shares,
debenture or commission or it can even be in the form of a lump sum
-amount.
• However, it must be noted that in absence of any express agreement
with the company after its incorporation, a promoter is not entitled
to claim from the company any remuneration for his services.
• A company is also not liable in absence of an agreement to
reimburse a promoter in respect of registration fee or stamp duty
paid by him for the registration of the company.
• Whatever be the remuneration or benefit paid to the promoter, it
must be disclosed in the prospectus if it is paid within two years
preceding the date of the prospectus.
Liabilities of a promoter:
 sec 26- lays down matters to be stated & reports to be set out in
the prospectus. Held liable for its non-compliance
 untrue statement in the prospectus.
 guilty of an offence- court may restrain him from taking part in
the management of the co- 5 years
 criminally liable- prospectus containing false & deceptive
statement
Thank You