INTRODUCTION TO COMPANY

ByManojBanthia

Companyderivedfromlatinterm(Com=withortogether;panis=bread)
Itis:
acollectionofmanyindividuals
unitedintoonebodyunderaspecialdomination
havingperpetualsuccessionunderanartificialform,and
vestedbythepolicyoflawwiththecapacity:
ofactinginseveralrespectsasanindividual,particularlyoftakingandgranting
property,ofcontractingobligations,andofsuingandbeingsued,
ofenjoyingprivilegesandimmunityincommon
ofexercisingavarietyofpoliticalrightsmoreorlessextensive
Salientcharacteristicsofacompany:
I CorporatePersonality Itisalegalpersondistinctfromitsmembers,large
orsmall;beneficiaryortrustee
Sal omon v Sal omon & Co Lt d
Ii LimitedLiability Liabilityofashareholderextendsonlyuptothe
nominalvalueofthesharesheldandnotpaidby
him
Iii Perpetualsuccession Beingalegalentityitdoesnotdieexceptwhenitis
woundup.
Iv Separateproperty Capableofowning,enjoyinganddisposingof
propertyinitsownname;shareholdersnotpart
owners.
V Transferabilityofshares Sharesaretransferableandnoshareholderis
permanentlyweddedtothecompany.
Vi CommonSeal Itistheofficialsignatureofthecompany.
Vii Capacitytosueandbesued Legalproceedingscanbeinstitutedbyoragainstthe
companyinthenameofthecompanyitself
Viii Contractualrights Canenterintocontractfortheconductofbusiness
ofthecompany
Ix Limitationofaction Cannotfunctionbeyondthepowersstatedinits
memorandumofAssociation
X Separatemanagement Managementandownershipofthecompanyare
distinct
Xi Voluntaryassociationforprofit
Xii Terminationofexistence Createdbylaw,carriesonbusinessaccordingtolaw
andceasestoexistbyoperationoflaw

DistinctionbetweenCompanyandPartnership
Company Partnership
ADistinctlegalperson Notdistinctfromthepersonsformingit
Limitedliability Unlimitedliability
Perpetualsuccession Deathorinsolvencyofapartnerdissolvesthe
firm
Numberofmembersunlimited(50incaseof
PvtLtd)
Numberofpartnerslimitedto20
Propertybelongstothecompany Propertyofthefirmisthepropertyofthe
individualscomprisingit
Creditorscanproceedonlyagainstcompany
andnotitsmembers
Adecreeagainstthefirmcanbeexecuted
againstthepartnersjointlyandseverally
Membersofacompanyarenotitsagents Partnersaretheagentsofthefirm
Membercanenterintoacontractwiththe
company
Apartnercannotcontractwithhisfirm
Companyssharescanordinarilybe
transferred
Transferofpartnersshareonlywiththe
consentoftheotherpartners
Restrictiononpartnersauthoritynotbinding
outsiders
Restrictionsinarticlesbinding
Dissolutionbylaw Dissolutionbyagreement

AdvantagesanddisadvantagesofaCompany
Advantages Disadvantages
Distinctlegalcorporatepersonality Formalitiesandexpenses
Limitedliability Corporatedisclosures
PerpetualSuccession Separationofcontrolfromownership
TransferableShares Greatersocialresponsibility
Separateproperty Detailedandcumbersomewindingup
procedure
Capacitytosue
Flexibilityandautonomy

Corporateveilpiercingof
Acompanyisadistinctlegalentityseparatefrompersonswhoareitsbeneficialowners.
Lookingbehindthecorporateentityandtakingactionasthoughnoentityseparatefromthe
membersexistedisknownasthedoctrineofliftingoforpiercingofcorporateveil.
CircumstancesinwhichCorporateveilcanbelifted:
1 Wherethecorporateveilhasbeenusedforcommissionoffraud
orimproperconduct
Jonesvlipman;

2 Wherethecorporatefaadeisactuallyanagencyinstrumentality InreRGFilmsLtd
3 Wherethedoctrineconflictswithpublicpolicy,courtsliftedthe
corporateveiltoprotectthepublicpolicy
ConnorsBrosv
Connors
4 Fordeterminingtheactualcharacterorstatusofacompany Diamlercoltdv
ContinentalTyre&
Rubberco
5 Wheretheveilhasbeenusedforthesolepurposeofevasionof
taxesandduties
InreSirDinshaw
ManakjeePetit
6 Inquasicriminalcases,courtshavesometimesliftedtheveil
7 IfthefunctioningofPSUleadtofailuretoperformconstitutional
duties,theStatewouldbecomeliable
KapilaHingoraniv
StateofBihar
8 Ifacompanyhasabuseditscorporatepersonalityforanunjustor
inequitablepurpose

9 SomestatutesrecognizeliftingofcorporateveilSections
45,147,212,247,242ofCompaniesAct,incometaxandwealthtax
legislations.

10 Useofcorporatestructuretoconcealcriminalactivities InreHandOthers
11 LiftingthecorporateveilincaseofSSI InalsaLtdvunionof
India

IllegalAssociation:
Section11NoCompany,associationorpartnershipconsistingofmorethan20persons(10
personsincaseofbankingbusiness)shallbeformedforcarryingonbusinessforgainunlessitis
registeredasacompanyorisformedinpursuanceofsomeotherIndianlaw.
NotapplicabletoJointfamilies
Carryingonofbusinessincontraventionofthisrequirementwillmakeeverymemberof
company,associationorpartnershippersonallyliableforallliabilities
AlsoliabletofineuptoRs.10000/
BabulalvLaxmiBharatTradingCoAssociationformedattheinstanceoftheGovernmentfor
distributionofgrain,hadanelementofgain;heldtobeillegal.
Effectofnonregistration:Associationisillegalandthelawdoesnotrecognizeitsexistence.It
ishowever,liabletobetaxed
Miscellaneous:
CompanyisapersonundertheCivilProcedureCodeSupremeCourtinUnionBankofIndiav
KhaderinternationalConstructionandOther
Company,thoughalegalperson,isnotacitizenStateTradingCorporationofIndiaLtdvCTO.
Section2(f)oftheCitizenshipActspecificallyexcludesacompanyfromcitizenship.
IndividualsfundamentalrightisnotlostmerelybecauseheisashareholderofacompanyRC
CoopervUnionofIndia

TYPES OF COMPANIES
1. PRIVATE COMPANY:
Definition[Section3(i)(iii)]:Itisacompanywhich:
(a) Hasaminimumpaidupcapitalofonelakhrupeesorsuchhighersumasmaybe
prescribed;and
(b) Byitsarticles:
i. Restrictstherighttotransferitsshares;
ii. Limitsthenumberofitsmemberstofifty(excludingemployeesand
exemployees)
iii. Prohibitsanyinvitationtosubscribeforanysharesinordebentures
ofthecompany;and
iv. Prohibitsanyinvitationoracceptanceofdepositsfrompersonsother
thanitsmembers,directorsortheirrelatives.
Otherfeatures:
Jointmembersshallbetreatedasasinglememberforcalculatingthelimitof
fifty
ThewordsPrivatelimitedmustbeaddedattheendofitsname
Itmusthaveatleasttwomembers(Section12)
Itshallhaveatleasttwodirectors(Section252)
TheActconferscertainprivilegesandexemptiononPrivateLimitedCompany
Specialobligationsofaprivatelimitedcompany
AlongwiththeAnnuaiReturn,itshallsendcertificatestatingthat
thecompany(a)hasnotissuedanyinvitationtopublicto
subscribetoitsshares;andwherethenumberofmembers
exceedsfifty,theyonlycompriseofemployeesorexemployees.
(Section161(2)(b)
Amemberofaprivatecompanycannotappointmorethanone
proxytoattendandvoteatameeting

IftheconditionscontainedinSec3(1)(iii)areinfringed,itshallceasetobea
PrivateCompany.

2. PUBLIC COMPANY:
Definition[Section3(i)(iv)]:ItmeansaCompany,which:
(a) Isnotapubliccompany;
(b) Hasaminimumpaidupcapitaloffivelakhsofrupeesorsuchsumasmaybeprescribed;
(c) Isaprivatecompanywhichissubsidiaryofacompanywhichisnotaprivatecompany
Otherfeatures:
Itshallhaveatleast7members
Itshallhaveatleast3directors
Consequencesofreductioninmembers:
thenumberfallsbelow2or7andthebusinessiscarriedonfor
morethansixmonths,theliabilityofthemembershallbe
unlimited(Section45)
Avalidgroundforcompulsorywindingup(Sec433(d)
Contributorymaypresentapetitionforwindinguponthisground
(Sec439(4)(a)

3. GUARANTEE COMPANY:
Itisacompanyhavingliabilityofitsmemberslimitedbyitsmemorandumtosuchamount
asthemembermayrespectivelyundertaketocontributetotheassetsofthecompanyin
theeventofwindingup.
NOTE:
AGuaranteecompanymayalsoissueshares.Inwhichcase,theliabilityof
memberswouldbetwofold;one,totheextentofamountunpaidonshares
andtwo,totheextentofamountguaranteedintheeventofwindingup.
4. UNLIMITED COMPANY: (Section 12(2)(c))
Itmeansacompanywhichdoesnothaveanylimitontheliabilityofitsmembers.The
liabilityofamemberextendstothewholeamountofcompanysdebtsandliabilities.
However,liabilityofmembersistowardscompanyandnotdirectlytowardscreditors.

Thearticlesofanunlimitedcompanyshallstatethenumberofmemberswithwhichitis
toberegistered.(Sec27(1))
Itmayhavesharescapital.Inwhichcase,thearticlesshallstatetheamountofshare
capitalwithwhichithastoberegistered[Sec27(1)]

Note
Anunlimitedcompanymayregisteritselfasalimitedcompany(Sec32).
However,thedebts,liabilities,obligationsorcontractspriorto
conversionshallremainunaffected.

5. ASSOCIATION NOT FOR PROFIT

Anassociationnotforprofitmayberegisteredasacompanywithlimitedliabilityundera
licencefromtheCentralGovernment.
Suchlicenceallowsitnottoaddtoitsnametheword(s)limitedorprivatelimited.
ThesearealsocalledaslicenceCompaniesorSection25Companies.
ThelicenceisgrantedonlyiftheCGissatisfiedthatanassociation:
istobeformedforpromotingcommerce,art,science,religion,charityor
anyotherusefulobject;and
intendstoapplyitsprofitsorincomeonlyforthepromotionofitsobjects
andprohibitspaymentofdividendtoitsmembers.
Alicencecompanyshallenjoyalltheprivilegesandbesubjecttoalltheobligations
(exceptthoseexempted)oflimitedcompanies.
Apartnershipfirmmaybeamemberofalicencecompany.
AlicencecompanyshallnotalteritsobjectsexceptwiththepreviousapprovalofCG

6. GOVERNMENT COMPANIES
DefinitionSection617:
AGovernmentcompanyisanyCompanyinwhichnotlessthan51%ofthepaidupshare
capitalisheldby:
(a) TheCentralgovernment;or
(b) AnyStateGovernmentorGovernments;or
(c) PartlybytheCentralgovernmentandpartlybyanyoftheStategovernments.

Section620:Centralgovernmentmaynotifynonapplicabilityorapplicabilitywith
exceptionsormodificationsoftheprovisionsoftheActtothegovernmentcompanies.
AGovernmentcompanyisneitheragovernmentdepartmentnoragovernment
establishmentHindustanSteelWorksConstructionLtdvStateofKerala
Governmentcompanieshaveacorporatepersonalityoftheirown,distinctfromthatof
thegovernmentofIndia.TheincomeortheassetsaretheassetsoftheCompany;the
governmentonlyownsthesharecapitalAndhraPradeshRoadTransportCorporation
vITO

AuditofGovernmentCompanies:
Section619:AuditorofaGovernmentcompanyshallbeappointedbythe
ComptrollerandAuditorGeneralofIndia
C&AGhasthepowertodirectthemannerinwhichtheaccountsaretobe
auditedandinstructtheauditor
AuditortosubmitacopyofhisauditreporttoC&AG,whomaycommentor
supplementtheauditreport
Thecommentsand/orsupplementaryreporttobeplacedbeforeAGM
CentralgovernmentmustplacebeforeParliamentanannualreportonthe
workingandaffairsofeachgovernmentcompanywithinthreemonthsofAGM
TheannualreporttobeplacedbeforestatelegislatureifStateGovernmentisa
member.

7. FOREIGN COMPANIES:
DefinitionSection591:
AforeignCompanyisacompanywhichisincorporatedinacountryoutsideIndiaand:
(a) HasestablishedaplaceofbusinessinIndiaafter141956
(b) Establishedaplaceofbusinessinindiabeforethatdateandcontinuetohaveaplaceof
businessinIndia.

Within30daysoftheestablishmentofplaceofbusiness,theforeigncompanyshallfile
withROC,NewDelhiandjurisdictionalROC:
Acertifiedcopyofinstrumentdefiningconstitutionofthecompanyor
Memorandum&ArticlesofAssociation
Addressofregisteredoffice
Listofdirectorsandsecretary
Nameandaddressofpersonauthorizedtoacceptserviceofdocuments
FulladdressofprincipalplaceofbusinessinIndia
Provisionsrelatingtoaccounts,theirfiling,creationofchargesapplicableasapplicable
toIndiancompanies
MaybewoundupasanunregisteredcompanyifitceasestocarryonbusinessinIndia
(Sec582to590)
Placeofbusiness:
Asharetransferofficeorshareregistrationofficeconstitutesplaceof
business
Mereholdingofpropertycannotberegardedasplaceofbusiness
Merereceivingofordersfromcustomersnotheldtobeaplaceof
business

8. HOLDING & SUBSIDIARY COMPANIES

Definition:Section4
Acompanyshallbedeemedtobeasubsidiaryofanother,ifandonlyif:
(a) TheothercompanycontrolsthecompositionofitsBoard(Boardcontrolledsubsidiary)
(b) Theothercompanycontrolsmorethanhalfofthetotalvotingpowerorholdsmore
thanhalfinthenominalvalueofitsequitycapital(Shareholdingcontrolledsubsidiary)
(c) Itisasubsidiaryofanycompanywhichisthesubsidiaryoftheothercompany(Chain
Subsidiary)

Subsidiarycompanycannotbeamemberofaholdingcompany,unlessitbecame
memberpriortobecomingitssubsidiary(Sec42)
Sharesheldinfiduciarycapacitytobeignored.
Sharesheldbyanomineeorbyanothersubsidiarytobecounted
Sharesheldassecurityforbusinesstransactioninordinarycoursetobeignored.

9. INVESTMENT COMPANIES:
Acompany,theprincipalbusinessofwhichconsistsofacquiring,holdinganddealingin
sharesandsecurities.

10. PRODUCER COMPANIES:

Section581Ato581ZTdealswithProducerCompanies.
Itisabodycorporate:
HavingobjectsoractivitiesspecifiedinSec581B
Whosemembershipisopentopeoplewhothemselvesaretheprimaryproducers
whichshallprimarilydealwiththeproduceofitsactivemembersforcarryingoutits
objects

11. STATUTORY CORPORATIONS:

ItisacompanyformedunderanActofParliamentorStateLegislature.Thespecialstatute
containsitsconstitutionandscopeofitsactivities

FeaturesofStatutoryCorporation:
1. OwnedbytheState 2. DistinctrelationwiththeGovernment
3. Createdbyaspeciallawof
parliamentorStatelegislature
4. Independentfinances

5. Immunityfromparliamentary
scrutiny
6. Commercialaudit

7. Freedominregardtopersonnel 8. Operationonbusinessprinciples
9. Itisabodycorporate

Note:
RamanDayaramShettyvInternationalAirportAuthorityIAAheldtobeStateandwas
requiredtoobserveprinciplesofequalityinitscontractualdealings
SomPrakashvUnionofIndiaBPCLwasheldtobeStateandhenceamenabletoWrit
jurisdiction
AjayHasiaVKhalidMujibRECheldtobestateandrequiredtoobserveprinciplesof
equalityforadmission