Legal Aspect of

Business
Tejpal sheth

Companies Act 2013

Types of Companies-Their
characteristics

Companies Act 2013

Types of companies-Its characteristics

X is a director who has experience

of 20 years on this basis X Ltd has
taken him as a director. Can X Ltd
say that the director X experience is
companys experience

Case analysis
Company is separate legal entity. Experience of
directors cant be said as experience of company.

Companies Act 2013

Types of companies-Its characteristics
S & Co. was formed with S, his wife, daughter and four sons as its
subscribers and the only members. The company took over the
shoe business of S for Rs. 30,000 giving him, as consideration,
20,000 shares of Rs. 1 each and debentures worth Rs. 10,000 with a
charge on the company's assets. All members, except S. purchased
one share each. S and his two sons constituted the Board of
directors of the company. Due to general trade depression, the
company went into liquidation. The assets of the company
amounted to Rs. 6.000 whereas its creditors amounted to Rs.
17,000Rs. 10,000 due to S (secured by the charge on company's
assets) and Rs. 7,000 due to unsecured creditors. S claims the
assets of the company as his debt is secured by the charge over
them. On the other hand, the unsecured creditors are contending
that they should be paid in priority over S as the company and S is
one and the same person. Who is entitled to assets?

Case analysis
S, secured creditor has priority as compared to
other unsecured creditor. It cant be said that S is
owner of company as he and his family members
are only members of company. Company is
separate legal entity. Unsecured creditors will get
money if company has money after payment of
due to secured creditors.

Companies Act 2013

Types of companies-Its characteristics
An English company was formed for selling in
England tyres produced by German company
in Germany. The majority of English
companys shares were held by the German
company. The overwhelming majority of the
shareholders and all directors were German
nationals residing in Germany. The English
company file suit during world war I to
recover trade debt. Could the company be
allowed to proceed with the action ?

Case analysis
Company cant be allowed to recover trade debt.
Company format of business is allowed to do
honest business and not for cheating or fraud. If
company formed is for unlawful purpose or object
which is prohibited, lifting of corporate veil can be
applied by court and act of company is
considered as act of director.
In the given case, company is formed by enemy
and agreement to do business with enemy is
prohibited.

Companies Act 2013

Types of companies-Its characteristics

H was appointed as a managing director

of X Ltd., on the condition that he shall
not entice away the customers of the
company during his stay in the
company or afterwards. He left the
services of the company and formed a
new company, V Ltd. which enticed
away Xs customers. What remedy is
available to X company, if any?

Case analysis
Where the medium of a company has been used
for committing fraud or improper conduct courts
have lifted the veil and looked at the realities of
the situation.
In the given case, X Ltd has option to file case
against the Mr. H, M.D., for lifting of corporate veil
and to make him liable for entice away customer.
Mr. H, has formed the company for the dishonest
mean. Therefore he cant claim benefit of
separate legal entity.

Companies Act 2013

Types of companies-Its characteristics

A public limited company has only

seven shareholders, all the shares being
fully paid up. All the shares of one such
shareholder are sold by the Court in an
auction and purchased by another
shareholder. The Company continues to
carry on its business thereafter. Discuss
the liabilities of the shareholders of the
company.

Case analysis
The liability of shareholders of
company limited by shares is
limited up to unpaid value of
shares.
Where all shares of one member is
purchased by another member, it
reduce the number of members of
company but it does not affect
liability of member in any way.

Companies Act 2013

Types of companies-Its characteristics

The Karta of joint Hindu family 'A',

consisting of 31 adult members and the
karta of another joint Hindu family 'B',
consisting of 22 adult members enter
into
partnership
without
getting
registered under the Companies Act.
After two years, some dispute arose and
they sought the help of the Court. Can
the Court interfere?

Case analysis
Court cant interfere in the dispute as it is dispute
related to illegal association. If any firm or
company carry on business with more than 50
members without registration under companies
act or any other law, it is illegal association.
In the given case, two HUFs enter into
partnership firm with (31+22) members. Thus
total number of members go beyond maximum
limit which require registration. As registration
has not been carried out. Thus, it is illegal
association.

Companies Act 2013

Types of companies-Its characteristics

Mr. P and his other 50 friends carry

on business under the name of P
Limited but it was not registered
under the Companies Act, 2013. Is
Mr. P is liable under the Act.

Case analysis
P is personally liable for transaction.
Any person or group of persons cant use the
name of company or represent corporate
character without registration with the authority
otherwise he will be personally liable.

Companies Act 2013

Types of companies-Its characteristics

An association of 52 persons starts

a banking business without being
registered. Four members retire and
thereafter a suit is instituted by one
of the continuing members for the
partition of the assets of the
business. Is the suit competent?

Case analysis
Suit is not competent.
Association in the given case is illegal because it
consist of more than 50 members and doing
banking
business.
More
over
subsequent
reduction in the number of members will not
convert the illegal association into legal
association.

Companies Act 2013

Types of companies-Its characteristics

Y Pvt. Co. is subsidiary of X Co.

which is a public Company? What is
type of Y Pvt. Is?

Case analysis
Subsidiary of public company is treated as public
company even though it is private company.
Therefore Y (P) Ltd is public company.

Companies Act 2013

Types of companies-Its characteristics

In a private company 199 members

are there who were first appointed
as a member then joined as an
employee. Two members holding
one share and 15 debenture
holders. Did the Company crossed
maximum limit?

Case analysis
Private company cant have more than 200
members. While counting 200 members exemployee or employee who are holding shares
are excluded. Debenture holders are also not
members of company.
In the given case, referring the above rule, it can
be said that company has not crossed maximum
limit.

Companies Act 2013

Types of companies-Its
characteristics
In a private limited company it is
discovered that there are, in fact, 204
members. On an equity, it is ascertained
that six of such members have been
employees of the company in the recent
past and that they acquired their shares
while they were still employees of the
company. Is it necessary to convert the
company into a public limited company?

Case analysis
Private company cant have more than 200
members. While counting 200 members exemployee or employee who are holding shares
are excluded.
In the given case, company has total 204
members but 6 of them are employees or exemployees who are not excluded while calculating
limit of 200. If we do so, number of members for
company is 198, i.e. within maximum limit of
private company. Therefore private company is
not
required to be converted into public
company.

Companies Act 2013

Types of companies-Its characteristics

Mr X is holding 500 equity shares of

Rs. 10 each on which Rs. 5 on each
shares is already paid. What
amount company can demand from
Mr. X?

Case analysis
Liability of member in case of company limited
shares is limited up to unpaid amount on shares.
In the given case, Mr. X has already paid Rs. 5 on
each shares. Hence he has liability to pay
remaining Rs. 5 on each shares.

Companies Act 2013

Types of companies-Its characteristics

The paid up capital of X Ltd is

1,00,000 equity shares of Rs. 10 each.
The central government, Government
of
Gujrat
and
Government
of
Tamilnadu
are
respectively
hold
4,00,00 50,000 and 50,000 equity
shares in company. Can X Ltd be
regarded as Government company ?

Case analysis
If the central government and all state
government together holding more than 50%
paid up capital of company, it is regarded as
government company.
In the given case, central and state governments
are holding exact 50% of paid up capital of
company. Therefore, company cant be said as
government company.

Companies Act 2013

Types of companies-Its characteristics

40% of the paid-up share capital of

company A is held by the Central
Government and 11% by public
institutions like the Life Insurance
Corporation of India and the Unit
Trust of India. Is A Ltd Government
Company?

Case analysis
If the central government and all state
government together holding more than 50%
paid up capital of company, it is regarded as
government company.
In the given case, central and state governments
are holding 40% of paid up capital of company.
Holding of shares by UTI & LIC are not included
into calculation of 50 %. Therefore, company
cant be said as government company.

Companies Act 2013

Types of companies-Its characteristics
The paid up share capital of XYZ (Private)
Company Limited is Rs. 20 lakhs consisting
of 2,00,000 Equity shares of Rs.10 each fully
paid up. ABC (Private) Limited and DEF
(Private) Limited are holding 60,000 and
50,000 shares respectively in XYZ (Private)
Limited. Examine with reference to the
provisions of the Companies Act, 1956
whether XYZ (Private) Limited is a
subsidiary company ?

Case analysis
Shares held by any person as a nominee for the
Company shall be treated as being held by the said
Company. Thus, the shares held by a subsidiary shall be
treated as held by the holding Company.
Here ABC Private Limited is holding 60,000 shares in
XYZ Private Limited and 50,000 shares held by DEF
private limited. Therefore, ABC Limited will be deemed
to be holding 1,10,000 Equity shares in XYZ Limited i.e.
more than half in nominal value of the Equity Share
Capital of XYZ Private Ltd. Hence XYZ Private Limited is
subsidiary of ABC Private Limited.
The answer will remain the same in the second case but
holding-subsidiary relationship is established by virtue
of Chain relationship i.e. a subsidiary of one Companys
subsidiary will also be considered as the subsidiary of
the second mentioned Company.

Companies Act 2013

Types of companies-Its characteristics

The promoters of a company, before

its incorporation, enter into an
agreement with P to buy a plot of
land on behalf of the company. After
incorporation the company refuses
to buy the said plot of land. Has P
any remedy either against the
promoters or against the company?

Case analysis
P does not have any remedy against company
but he has remedy available against Mr. P.
In the given case, Mr. P entered into contract on
behalf of company but before incorporation of
company. It is pre-incorporation contract. For
pre-incorporation contract, company cant be
sued. But for pre-incorporation contract, person
who has entered into contract can be held
personally liable.