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IV Sem B.com Corporate Regulations www.CUStudents.in

Module 1- 4. Number of Members
Introduction to Companies Act, 2013 The maximum number of members allowed in a
Companies bill 2012, was introduced and passed private company is 200.
by in Loksabha on 18 th December 2012 and 5. Duties of Directors Defined
passed by Rajya sabha on 8 th August 2013. Duties of directors of all companies are spelt out
The Companies Bill, 2013 on receiving the in section 166 of the 2013 Act based on case laws.
assent of Honorable President of India on August
29,2013 was notified in the Gazette of India on Company - Meaning and Definition
August 30,2013 as the Companies Act,2013.The The word ' company ' is derived from the Latin
enforcement date of this Act is 1st April 2014. The words,' com ' which means ' together ' and the
Act contain 470 sections and 7 Schedules. word ' panies ' which means ' bread '. A company
Objects of the Act thus an association of persons who took their
meals together.
1. To introduce the content of the
A company is an incorporated association, which
substantive portion of the related law in
is an artificial person created by law, having an
the Companies Act,2013 as compared to
independent legal entity, with capital divisible into
the companies Act,1956.
transferable shares carrying limited liability,
2. To enable the corporate sector to conduct
having a common seal and perpetual succession.
its affairs responsibly and transparently
According to section 2(20) of the Companies Act,
3. Introducing new concepts such as one
2013, “a company means a company
Person Company, small. Company and
incorporated under this Act or under any previous
dormant company.
company Law “- This is not a comprehensive
4. Provide for mergers, amalgamations and
definition
takeovers
According to W.H Haney " A company is an
5. Corporate Social Responsibility is
incorporated association, which is an artificial
introduced so as to encourage a socially,
person created by law, having separate entity
environmentally and ethically responsible
with a perpetual succession and a common seal”
behaviour by companies.
Justice James defines a company as “a company is
6. Creation of the National Company Law
an association of persons united for common
Tribunal (NCLT) and National Company
object."
Law
Company Law or Corporate Law is the law that is
7. Appellate Tribunal.
concerned with the creation and regulation of
8. Creating National Financial Reporting
companies.
Authority (NFRA)
Characteristics of a Company
Salient Features Of The Act,2013
1. Voluntary Association
1. One Person Company (OPC) Company is a voluntary association of persons
The act provides for the formation of one Person that is., it can neither compel a person to become
Company. It may have only one director and one its member nor to give up his membership. It is the
shareholder. personal choice of people and their desire to get
2. Corporate Social Responsibility (CSR) profit or some other object of their own which
The Companies Act, 2013 stipulates certain classes inspires them to become members of the
of companies to spend a certain amount of money company.
every year on activities reflecting Corporate Social 2. Separate Legal Entity
Responsibility. Company can hold and deal with any type of
3. National Company Law Tribunal (NCLT) property in its ownership in any way it likes. It can
The Companies Act, 2013 introduced the enter into contracts, open bank account in its own
National Company Law Tribunal and National name, sue and be sued by its members as well as
Company Law Appellate Tribunal to replace the outsiders. The creditors of the company can
Company Law Board and Board for Industrial and recover their money only from the company and
Financial Reconstruction. the property of company. Similarly the company is
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not in any way liable for the individual debts of its 8. Capacity to sue and be sued
members.
A company is a legal person and has
3. Perpetual Succession independent existence. Because of this particular
Company has perpetual succession and is feature a company can file suits against others in
independent of the life of its members. Its its own name and others can file a suit against a
existence is not affected in any way by the death, company. That is a company can sue and be sued
insolvency of any share holder. in its corporate name.
4. Limited Liability
9. Large amount of Capital
The liability of the members of a company is
Capital refers to the amount invested in the
generally limited. In the case of a company limited
company so that it can carry on its activities. A
by shares the liability of members is limited to the
company can raise huge amount by way of shares
extent of the nominal value of shares held by
from among the shareholders.
them. A shareholder can never be asked to pay
anything more than the unpaid value of the share 10. Winding up
money. In the case of a guarantee company, the
members are liable to contribute a specified Winding up represents the last stage in company
agreed sum to the company in the event of the life. It is a proceeding by which a company
company being wound up. dissolved. The company's assets are disposed of
and the debts paid off out of the realized assets,
5. Transferability of Shares and the surplus any is then distributed among the
members in proportion to their holdings in the
In a public company the shares are freely
company.
transferable. The right to transfer shares is a
KINDS OF COMPANIES
statutory right and it cannot be taken away by a
1.On the Basis of Incorporation
provision in the Articles. Section 44 states this
(a). Chartered Companies
principle by providing “that the shares or other
This form of company could be formed by the
interest of any member in a company shall be
crown. Crown had always the power to grant
movable property, transferable in the manner
charter of incorporation and it was by this means
provided by the articles of the company.
that chartered companies were formed. A
6. Artificial Legal Person chartered company is regulated by the charter
incorporating it and the companies Act does not
A company is an artificial legal person. It is
apply to it.Examples of such companies are the
created by a process other than natural birth. It
East India Company, Chartered Bank, Bank of
does not possess the physical attributes of a
England etc. Such type of companies were in
natural person. At the same time, it is clothed with
existence in India before independence and at
many of the rights of a natural person. It is
present such companies do not exist in
invisible, intangible, immortal and exists only in
India.
the eyes of law. It has no body and no soul.
(b). Statutory Companies
Because of these physical disabilities a company is
A company formed under a special statute or Act
called an artificial person. But it cannot be treated
passed by the Parliament or State Legislature is
as a fictitious entity because it really exists.
known as statutory company. This form of
7. Common Seal incorporation is used extensively to promote
public utility enterprises such as Railway, Gas and
As a company is an artificial person, it acts Electricity Companies and the Reserve Bank of
through natural persons who are known as India. These companies are formed in the case of
directors. All contracts entered into by directors national importance. These companies do not
must be under the common seal of the company. have any Memorandum or Articles of
The common seal with the name of the company Association.
engraved on it, is used as a substitute for its (c). Registered Companies
signature.
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These are the companies formed under the (a).Private Company [ section 2(68) , 3(1) ]
companies Act 2013 or some earlier Companies A company which is formed with a minimum
Act. Such Companies come into existence only number of two persons is known as a private
when they are registered under the Act and a company. This form of company is most suitable
certificate of incorporation has been issued by the for carrying business in a family set up.
Registrar. So public registration is an essential According to section 2(68) of the Act, “private
feature of these type of companies. These company " means a company having a minimum
companies derive their powers from the paid up share capital and which by its articles
companies Act and from Memorandum of (i). Restricts the right to transfer its shares;
Association, and its internal rules and regulations (ii). except in case of one person company, limits
are described in its Articles of Association. the number of its members to two hundred.
2. On the Basis of Liability So a private company can be formed with a
(a). Companies Limited by Shares minimum of two members and its maximum is
“Company limited by shares” means a company limited to two hundred and no minimum Paid-up
having the liability of its members limited by the Capital requirements will now apply for
memorandum to the amount if any, unpaid on the incorporating a private company. It does not invite
shares respectively held by them [section 2(22)]. the public to subscribe its shares, and share
That is if a shareholder has already paid the total transfer also is restricted. It must add the words
amount of his share, he shall have no further “Private Limited " at the end of its name.
liability at all. If any amount is remained unpaid on (b).Public Company
shares, it can be called up at any time during the Public company means a company which
lifetime of the company or at the time of winding (i) is not a private company
up (ii) has a minimum paid up share capital
(b). Companies Limited by Guarantee Provided that a company which is a subsidiary of a
A company limited by guarantee " is a company company, not being a private company shall be
having the liability of its members limited by the deemed to be public company for the purpose of
memorandum to such amount as the members this Act even where such subsidiary company
may respectively undertake by the memorandum continued to be a private company in its articles.
to contribute to the assets of the company in the So in a public company, there is no restriction to
event of its being wound up " [ section 2(21) ]. the number of shareholders, and can invite the
Such amount is only required when the company public to subscribe its shares, and the shares are
is wound up. Such companies may or may not have freely transferable. But minimum seven persons
share capital. But they are formed generally are required to form a public company. As per
without share capital for non-trading purpose, Companies Act (Amendment) 2015, the minimum
such as for the promotion of art, science, paid up share capital requirement of Rs.5, 00,000
commerce, culture, charity, sports etc. The for forming a public company has been done away
chambers of commerce, trade association and with and no minimum paid up capital
sports clubs are usually guarantee companies. requirements will now apply for incorporating
(c). Unlimited Companies public companies in India.
Section 2(92) defines an unlimited company “as a Differences between a Private Company and a
company not having Public Company
Any limit on the liability of its members ". Liability 1.Number of Members
in such a case extend to personal property of the The minimum of members required to form a
shareholders and each and every member is liable private company is two, while it is seven in the
for the debt of the company. case of a public company. The maximum number
3. On the Basis of Number of Members members in a private company is two hundred,
On the basis of number of members a company where as there is no maximum limit in a public
may be a private company, a public company and company.
a one person company (to be formed as private 2.Public invitation of capital There is no public
limited company ). invitation in the share capital of a private company
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But public invitation is allowed in the case of a Privileges or Advantages of a Private Company
public company. Private companies enjoy certain privileges which
3.Transferability of shares are as follows
The shares of a public company are freely 1. Only two persons are required to form a private
transferable, but it is restricted in the case of a company.
private company. 2. A private company need not observe the
4. Number of directors provisions regarding the issue of prospectus,
The number of directors required in the case of a receiving minimum subscription, allotment of
private company is two, but in a public company shares etc. It can raise capital privately.
there should be at least three directors. 3. Minimum number of directors in a private
5. Prospectus company shall be only two.
In a public company, issue of a prospectus is 4. There are no restrictions with regard to the
required, but a private company is not required to remuneration payable to the directors.
issue a prospectus. 5. Two members personally present shall be the
6. Minimum subscription quorum of meeting of a private company.
When a public company makes an offer for issue 6. Annual evaluation in the board's report is not
of shares, it can carry out allotment only after applicable in the case of a private company.
receiving minimum subscription. But a private 7. The requirement of retirement by rotation of
company need not wait for minimum subscription directors does not apply in a private company, and
for proceeding with the issue of shares. all its directors can be permanent directors.
7. Provision for entrenchment in articles 8. A private company is not required to offer
In the case of a private company, provision for further issue of share capital to existing
entrenchment in the articles are concerned, it is to shareholders, and it can allot new issue to
be agreed and approved by all the members. But outsiders.
in the case of a public company, it is to be agreed 9. All the directors may be appointed by a single
and approved through a special resolution. resolution in the case of a private company(c). One
8. Quorum of meetings Person Company (OPC )
Two members personally present shall be the A one person company is a kind of private
quorum for a meeting of a private company. And company having only one member. Section 2(62)
in the case of a public company five members of the Companies Act, 2013, “one person company
personally present (number of members 1000) or " means a company which has only one person as
fifteen members ( number of members more than a member. As per section 3(1), A company may be
1000 but upto 5000) or thirty members ( members formed for any lawful purpose by one person,
exceed 5000 ) shall be the quorum for a meeting. where the company to be formed is to be one
9. Managerial remuneration person company that is to say, a private company
There is no restriction as to payment of managerial by subscribing his name to a memorandum and
remuneration to the directors of a private complying with the requirements of this Act in
company. But there are legal restrictions on respect of registration.
remuneration of directors in a public company and 4. On the Basis of Ownership
the total managerial remuneration cannot exceed (a). Government Companies
11 % of netProfits A public enterprise incorporated under the Indian
10. Special privileges Companies Act, 2013 is called a government
Some special privileges are enjoyed by a private company. These companies are owned and
company, such as minimum number of members managed by the Central or the State Government.
and directors, but there are no such privileges for According to Indian Companies Act, 2013 [section
a public company. 2(45)], a government company means " any
11. Use of ' Limited ' word company in which not less than 51% of the paid up
The private limited company must have the words share capital is held by the Central Government or
' Private Limited ' in its name. But a public limited by any State Government or Governments or
company must have only the word ' Limited ' in its partly by the Central Government and partly by
name. the one or more State governments, and includes
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a company which is a subsidiary company of such Documents, etc. to be delivered to Registrar by
a Government Company ". Foreign Companies. [Section (380) ].
This is a type of organization where both the Every foreign companies shall, within 30 days of
Government and private individuals are the establishment of its place of business in India
shareholders. Sometimes these companies are deliver to the Registrar for registration.
called a mixed ownership company.
 a certified copy of the charter, statutes or
Eg : State Trading Corporation of India , Minerals
memorandum and articles, of the
and Metals Trading Corporation of India
company or other instruments
(b). Non-Government Companies
constituting or defining the constitution
Non-Government companies include all those
of the company and, if the instrument is
companies which are registered under the
not in the English language, a certified
Companies Act but not as Government Company.
translation thereof in the
5. On the Basis of Control
(a). Holding Company  English language ;
A company is known as holding company of  the full address of the registered or
another company, if it has control over other principal office of the company ;
company. According to Section 2(46) of  a list of directors and secretary of the
Companies Act, 2013 " holding company " in company containing such particulars as
relation to one or more other companies means a may be prescribed ;
company of which such companies are subsidiary  the name and address or names and
companies. addresses of one or more persons
(b). Subsidiary Companies resident in India authorised to accept on
According to Section2(87) of the behalf of the company service of process
Companies Act, 2013, a company is known and any notice or other documents
to be ' subsidiary company ' or ' subsidiary ' , in required to be served on the company ;
relation to any other company ( that is to say the  the full address of the office of the
holding company ) means a company in which the company in India which is deemed to be
holding company - its principal place of business in India ;
(i). Controls the composition of the Board of  particulars of opening and closing of a
Directors; or place of business in India on earlier
(ii). exercise or controls more than one-half of the occasions ;
total share capital either of its own or together  declaration that none of the directors of
with one or more of its subsidiary companies the company or the authorized
6. On the Basis of Nationality representative in India has ever been
(a). National Companies convicted or debarred from formation of
A company formed under a specific company Act companies and management in India or
of nation is abroad ; and
Known as national company. E.g.: A company  Any other information as may be
formed and registered under the Indian prescribed.
Companies Act is known as an Indian company.
Display of Name, etc of Foreign Company
(b). Foreign Companies
(Section 382 )
Foreign company is one incorporated outside
India. As per section 2(42) of the Companies Act, (a) The company should exhibit on the
2013, “Foreign Company” means any company or outside of every office or place where it carries on
body corporate incorporated outside India which business in India the name of the company and the
(i). has a place of business in India whether by itself country in which it is incorporated.
or through an agent physically or through
(b) The name of the company and of the
electronic mode; and
country in which the company is incorporated, to
(ii). Conducts any business activity in India in any
be stated in legible English characters in all
other manner.
business letters, bill-heads and letter paper, and in
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all notices, and other official publications of the application to the Registrar in such a manner as
company may be prescribed for obtaining the status of a
dormant company.
(c) If the liability of the members is limited,
it is The Act further explains an inactive company and
significant accounting transactions.
(i) to be stated in every prospectus issued and
in all business letters, bill-heads, letter paper, (i) " inactive company " means a company
notices, advertisements and other official which has not been carrying on any business
publications of the company, in legible English or operation, or has not made any significant
characters accounting transaction during the last two
financial year, or has not filed financial
(ii) is to be exhibited on the outside of every
statements and annual return during the last
office or place where it carries on business in India,
two financial years ;
in legible English characters.
(ii) " significant accounting transaction " means
OTHER FORMS OF COMPANIES any transaction other than
 payment of fees by a company to the
Small Company
Registrar
Section2(85) definesa small company as a  payments made by it to fulfil the
company, other than a public company requirements of this Act or any other
law ;
(i) paid up share capital of which does not  allotment of shares to fulfil the
exceed 50 lakh rupees or such higher requirements of this Act ; and
amount as may be prescribed which
 Payments for maintenance of its office
shall not be more than five crore rupees
and records.
; or
(ii) turnover of which as per its last profit The Registrar shall maintain a register of dormant
and loss account does not exceed two companies.
crore rupees or such higher amount as
Listed Company (section 1(52))
may be prescribed which shall not be
more than twenty crore rupees ; Listed company means a company which has any
of its securities listed on any recognized stock
Provided that nothing in this clause shall apply
exchange. So the Act covers all types of companies
to-
and not only Public companies.
(a) a holding company or a subsidiary company
Associate Company (section 2(6))
(b) a company registered under section 8 ; or
(c) a company or body corporate governed by Associate company in relation to another
any special Act ; company means a company in which that other
company has a significant influence, but which is
A holding or subsidiary company can never enjoy
not a subsidiary company of the company having
the privileges of a small company even though
such influence and includes a joint venture
they may fulfil the capital or turnover requirement
company. Significant influence means control of at
of a small company.
least twenty percent of total share capital or of
Dormant Company (Section 455) business decisions under an agreement.
The Companies Act, 2013 introduce a new concept Producer Company
i.e., dormant company which means a company
The Companies Act 2013 does not contain any
which is not active. Section 455 of the Act states
provisions of producer companies. So the
that, where a company is formed and registered
producer companies are still governed by the
under this Act for a future project or to hold an
companies Act, 1956. Companies (Amendment )
asset or intellectual property and has no
Act,2002 had added a new part IX A to the main
significant accounting transaction, such a
companies Act , 1956 consisting of 46 new
company or an inactive company may make an
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sections from 581A to 581 ZT.According to the research, social welfare, religion, charity,
provisions as prescribed under section 581 A(I) a protection of environment or any such
producer company means a body corporate other object.
having objects or activities specified in section 581 (b) The company on incorporation intends to
B and registered as producer company under this apply its profit if any, of other income in
Act. The membership of producer companies is promoting such objects
open to such people who themselves are the (c) The company intends to prohibit the
primary producers, that is persons engaged in an payment of any dividend to its members
activity connected with primary produce.
Corporate Veil
Primary produce means produce of farmers arising
Juristic point of view, a company is a legal person
from agriculture including animal husbandry,
distinct from its members. This recognition of the
horticulture, floriculture, pisciculture, viticulture,
company as a separate legal entity and liable for
forestry etc.: produce of persons engaged in
its own acts and liabilities, is known as the
handloom, handicraft etc.
corporate veil. The effect of this principle is that
Objects there is a fictional veil (and not a wall) between the
company and its members. This separates the
(i) Production, harvesting, procurement,
personality of a company from the personalities of
grading, pooling, handling, marketing,
its shareholders and protects them from being
selling export of primary produce of
personally liable for the firm’s debts and other
members or import of goods or services for
obligations.
their benefit.
(ii) Processing including preserving, Lifting of Corporate Veil
drying,distilling,brewing,venting,canning
The term ' lifting of corporate veil ' means looking
and packaging of produce of its members ;
behind the company as a legal person; i.e..,
and
disregarding the corporate entity and paying
(iii) Manufacture, sale or supply of machinery,
regard, instead, to the realities behind the legal
equipment or consumables mainly to its
facade. Where the courts ignore the company and
members.
concern themselves directly with the members or
The other objects include rendering technical or managers, the corporate veil may be said to have
consultancy services, insurance, etc. been lifted only in appropriate circumstances, are
the courts willing to lift the corporate veil and that
Niches
too, when questions of control are involved rather
Niche means a company which has been than merely a question of ownership.The various
incorporated with the object of cultivating the cases in which corporate veil have been lifted are
habit of thrift and savings amongst its members, as follows.
receiving deposits from , and lending to, its 1. under judicial interpretation
members only, for their mutual benefit, and which There is a vast scope for the court to lift the
complies with such rules as are prescribed by the corporate veil under judicial interpretation. There
Central Government for regulation of such class of are a number of cases, in which the court lift the
companies ( section 406 ). corporate veil, and a few of them are mentioned
Association Not for Profit below
Any person or association intending to be
1. Protection of Revenue The court may
registered as a limited company for charitable
ignore the corporate entity of a company
purpose can apply for registration of companies
where it is used for tax evasion. Tax
with charitable objects. However it shall prove to
planning may be legitimate provided it is
the satisfaction of the Central Government that
within the framework of law
[section 8(1)]
2. Prevention of fraud or improper conduct
(a) Its objects included the promotion of The legal personality of a company may also
commerce, art, science, sports, education, be disregarded in the interest of justice
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IV Sem B.com Corporate Regulations www.CUStudents.in
where the machinery of incorporation has (b) (b)Fraudulent application for removal of
been used to some fraudulent purpose like name ( Section 251(1) )
defrauding creditors or to avoid legal
Where it is found that, an application by a
obligations.
company has been made with the object of
3. Determination of the enemy character of a
evading the liabilities of the company or with the
company a company may assume enemy
intention to deceive the creditors or to defraud
character, when persons in defector control
any other person, the person in charge of the
of its affairs are residents in an enemy
management of the company shall,
country. In such a case the court may
notwithstanding that the company has been
examine the character of persons in real
notified as dissolved, be jointly and severally liable
control of the company, and declare the
to any persons who had incurred loss or damage
company to be an enemy company.
as a result of the company being notified as
4. Where the company is a sham the court
dissolved.
also lift the veil where the company has
been formed for some fraudulent purpose (c) (c)Liability for fraudulent conduct of
or is a “sham ". business
5. Company avoiding legal obligations
.Where the use of an incorporated company If in the course of the winding up of a company it
is being made to avoid legal obligations the appears that any business of the company has
court may disregard the legal personality of been carried on with the intent to defraud
the company and proceed on the creditors of the company or any other persons or
assumption as if the company existed. for any other fraudulent purpose, the Tribunal, on
6. Avoidance of welfare legislation Avoidance the application of the Official Liquidator, or the
of welfare legislation is as common as Company Liquidator or any creditor or
avoidance of taxation, and approach to the contributory of the company, may if it thinks it
courts in considering problems arising out proper to do so, declare that any person who is or
of such avoidance is generally the same as has been a director, manager or officer of the
avoidance of taxation. company, or any persons who were knowingly
7. Protecting public policy the court invariably parties to the carrying on of the business in the
lift the corporate veil to protect the public manner aforesaid shall be personally responsible,
policy and prevent transaction contrary to without any limitation of liability, for all or any of
public policy. the debts or other liabilities of the company as the
Tribunal may direct.
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