COMPANIES ACTFor Education Purpose Only.

Sayali PuriClass 2

Today's Session◦ Introduction◦Definition◦Nature of Company◦ Advantages of a company◦Disadvantages of a company◦Distinction between Company and Partnership

◦ The use of the word company merely dose not indicate that a it is a company.

◦ Pestonjee &co. is not a company.

◦ The indicative factory is “limited” or “Private Ltd”◦ Air India Ltd/Pepsico India Holdings Pvt Ltd

◦ Exception:- charitable institution. the Central Government may, by licence issued in such manner as may be prescribed, and on such conditions as it deems fit, allow that person or association of persons to be registered as a limited company under this section without the addition to its name of the word “Limited”, or as the case may be, the words “Private Limited”. Section 8

DEFENITION ◦ IT’s a voluntary incorporated association which is an artificial person created by law with

limited liability having common seal and perpetual succession. According sec 3(1)1 of companies act company means "a company formed and registered under the act, or an existing company.

◦ Chief Justice Marshall of USA, “A company is a person, artificial, invisible, intangible, and existing only in the contemplation of the law. Being a mere creature of law, it possesses only those properties which the character of its creation of its creation confers upon it either expressly or as incidental to its very existence”.

◦ Lord Justice Lindley, “A company is meant an association of many persons who contribute money or money’s worth to a common stock and employ it in some trade or business, and who share the profit and loss (as the case may be) arising there from. The common stock contributed is denoted in money and is the capital of the company. The persons who contribute it, or to whom it belongs, are members. The proportion of capital to which each member is entitled is his share. Shares are always transferable although the right to transfer them is often more or less restricted”.

◦ From the above definitions, it can be concluded that a company is registered association which is an artificial legal person, having an independent legal, entity with a perpetual succession, a common seal for its signatures, a common capital comprised of transferable shares and carrying limited liability.

◦ 1956 According to Section 3(1)(i) of the Companies Act, a company means, " A company formed and registered under this Act or an existing company."

◦ 2013 According to Section 2 (20) of the Companies Act, a company means, " A company incorporated under this act or under any previous company law.

Nature of Company◦A. Company is not a Citizen.◦It is a well known fact that a Company is an Artificial Person meaning its man-

made or made through operation of law. But whether this artificial person can have the citizenship of the country. is a question we will discuss here-under.

◦As per the Citizenship Act. 1955. only natural persons can be -Citizen" and not any juristic persons like corporations. (State Trade Co. v. C.T.O.. AIR 1963 S.C. 1811).

◦And therefore. as a Company is an Artificial Person or as above said a juristic person and not a natural person. it can not get the status of citizenship of the country.

◦Even though a Company do not get the citizenship of a country. it still can get a resident status.

◦ juristic person. : a body of persons, a corporation, a partnership, or other legal entity that is recognized by law as the subject of rights and duties —called also artificial person, conventional person, fictitious person.

B. Nationality, Domicile, and Residence of a Company.

◦The nationality and domicile of a company are determined by its place of registration. 

◦The residence of a company is of great importance in revenue law, and at common law the test of company residence is where its real business is carried on, that is to say where its central control and management is located. 

◦The residence of a company is of great importance in revenue law, and at common law the test of company residence is where its real business is carried on, that is to say where its central control and management is located. A company which is incorporated in the United Kingdom is, however, regarded for the purposes of the Taxes Acts as resident there and, accordingly, if a different place of residence is given by any rule of law, that place is no longer to be taken into account for those purposes

C. Company is a Corporation or a Body Corporate.

◦Body Corporate:- 2(11)◦ “body corporate” or “corporation” includes a company incorporated outside India, but

does not include—(i) a co-operative society registered under any law relating to co-operative

societies; and(ii) any other body corporate (not being a company as defined in this Act), which

the Central Government may, by notification, specify in this behalf;◦Corporation/ Corporate sole:- Firm that meets certain legal requirements to be

recognized as having a legal existence, as an entity separate and distinct from its owners. Corporations are owned by their stockholders (shareholders) who share in profits and losses generated through the firm's operations, and have three distinct characteristics (1) Legal existence: a firm can (like a person) buy, sell, own, enter into a contract, and sue other persons and firms, and be sued by them. It can do good and be rewarded, and can commit offence and be punished.

Advantages of Incorporation.

Independent Corporate Existence.• Company is in law regarded as an entity separate

from its members,• It has an independent corporate existence • Any of its members can enter into contracts with it in

the same manner as other individual can and he cannot be held liable for the acts of company even if he holds virtually the entire share capital.

Limited liability

◦The priniciple of limited liability is a feature as well as a priviliege of the corporate form of enterprise.◦The liability of the members is limited◦A shareholder cannot be called upon to pay anything more than the unpaid value of the share. ◦Creditor cannot demand a shareholder to settle his claim from the company out of the private funds of the shareholder

Perpetual succession◦A company never Dies

◦ "Members may come and go but the company can go on forever“.

◦ If all the members die, it shall not affect the privileges and possessions of the company.

Common seal

◦Being an artificial person, a company cannot sign in the documents and issue certificates.

◦It can act only through an agent or representative known as director.

◦The common seal is considered as the official signature of the company.

◦All the acts must be authenticated by its common seal

Transferability of shares ◦The capital of the company is divided into several small parts known as shares.

◦The law also considers the share of a company as movable property and hence like any other movable asset, The shareholder can transfer his share to some other person.

◦The transfer can be effected only in the manner specified in the Articles of the company and in the Companies Act.

Separate Property ◦A company, being a legal person to acquire, possess and dispose of property in its own name.

◦The property of the company will not be considered as the joint property of the members constituting the company, although the capital and assets of the company are contributed by members.

◦The incorporation helps the property of the company to be clearly distinguished from that of his members.

Capacity to sue and be sued ◦A company being a legal person, can sue other persons in its corporate name.

◦ Similarly , others can also sue the company in their own name.

◦If there is any criminal complain, one company can be sued, but there has to be a natural person behind it.

Professional Management◦A company is capable of attracting professional managers. ◦It is due to the fact that being attached to the management of the company gives them the status of business or executive class.

Democratic Set up◦Democratic Method of Management

◦The shareholders select the directors to run the management of the company. i.e

A fairly big group elects a small group for the management.

It adds to the quality to the management of the company.

Capacity to raise Finances.◦ Public company can issue Prospectus.

◦ Banks and finanical institutions will fund the company money.

◦ Floating charge.

Disadvantages.

1) Lifting of corporate veil-◦  though for all purposes of law a company is regarded as a separate entity it is

sometimes necessary to look at the persons behind the corporate veil.◦ a)      Determination of character- The House of Lords in Daimler Co Ltd. v.

Continental Tyre and Rubber Co., held that a company though registered in England would assume an enemy character if the persons in de facto control of the company are residents of an enemy country.

◦ b)      For benefit of revenue- The separate existence of a company may be disregarded when the only purpose for which it appears to have been formed is the evasion of taxes. – Sir DinshawManeckjee, Re / Commissioner of Income Tax v. Meenakshi Mills Ltd.

◦ c)      Fraud or improper conduct- In Gilford Motor Co v. Horne, a company was restrained from acting when its principal shareholder was bound by a restraint covenant and had incorporated a company only to escape the restraint.

◦d)      Agency or Trust or Government company- The separate existence of a company may be ignored when it is being used as an agent or trustee. In State of UP v. Renusagar Power Co, it was held that a power generating unit created by a company for its exclusive supply was not regarded as a separate entity for the purpose of excise.◦e)      Under statutory provisions- The Act sometimes imposes personal liability on persons behind the veil in some instances like, where business is carried on beyond six months after the knowledge that the membership of company has gone below statutory minimum(sec 45), when contract is made by misdescribing the name of the company(sec 147), when business is carried on only to defraud creditors(sec 542).

◦2)      Formality and expense- Incorporation is a very expensive affair. It requires a number of formalities to be complied with both as to the formation and administration of affairs.◦3)      Company not a citizen- In State Trading Corporation of India v. CTO, the SC held that a company though a legal person is not a citizen neither under the provisions of the Constitution nor under the Citizenship Act.

Distinction between Company and Partnership◦1)      Legal status- A company is a distinct legal person. A partnership firm is

not distinct from the several members who compose it.◦2)      Property- In partnership, the property of the firm is the property of the

members comprising it. In a company, it belongs to the company and not to the members comprising it.

◦3)      Mode of creation- A company comes into existence after registration under the Companies Act, 1956, while registration is not compulsory in case of a partnership firm.

◦4)      Agents- Partners are the agents of the firm, but members of a firm are not its agents.

◦5)      Contracts- A partner cannot contract with his firm, whereas a member of a company can.

Distinction between Company and Partnership◦ 6)      Transferability of shares- A partner cannot transfer his share and make the

transferee a member of the firm without the consent of other partners whereas a company’s share can easily be transferred unless the Articles provide otherwise and the transferee becomes a member of the firm.

◦ 7)      Liability- A partner’s share is always unlimited whereas that of a shareholder may be limited either by shares or a guarantee.

◦ 8)      Perpetual succession- The death or insolvency of a shareholder or all of them does not affect the life of the company, whereas the death or insolvency of a partner dissolves the firm, unless otherwise provided.

◦ 9)      Audit- A company is legally required to have its accounts audited annually by a chartered accountant, whereas the accounts of the partnership are audited at the discretion of its members.

Distinction between Company and Partnership◦10)  Number of members- The minimum number of partners in a firm is 2 and maximum is 20 in any business and 10 in banking business. In case of a private company the minimum number of members are 2 and maximum is 200. In case of a public company the min num of members are 7 and no max limit.◦11)  Dissolution- a company can only be dissolved as laid down by law. A partnership firm can be dissolved at any time by an agreement.

Registration of a Company.◦ FORMATION OF A COMPANY In terms of Section 3(1), a company may be formed for

any lawful purpose by— ◦ a. seven or more persons, where the company to be formed is to be a public

company; ◦ b. two or more persons, where the company to be formed is to be a private

company; or ◦ c. one person, where the company to be formed is to be One Person Company that is

to say, a private company, by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration.

This is done by subscribing to their names or his name to a memorandum and complying with the requirements of this Act in respect of registration.

◦ A company formed under the above points may be either— (a) a company limited by shares; or (b) a company limited by guarantee; or (c) an unlimited company

5. Documents to be filed for Incorporation Section/ prescribes the various documents and information to be filed with RoC for registration of a new company as under◦MoA and AoA duly signed and verified. ◦ (2) Declaration by Professionals INC-o8. ◦ (3) Declaration from Director. Manager or Secretary. ◦ (4) Affidavit from each subscribers and first directors INC-o9. ◦ (5) The address for correspondence. ◦ (6) Complete Details of Subscribers with proof of identity.◦ (7) Complete Details of first Directors w ith proof of identity.◦ (8) Particulars of interest of first directors in other farm/body corporate and NoC.

Certificate of incorporation:◦ After the RoC is satisfied that all documents and information which is required has

been filed in the prescribed manner and along with prescribed fee, the Certificate of Incorporation shall be issued by the Registrar in Form No. INC-n Every company must have a registered office from the day it starts its business or within 3o days of getting the Certificate of Incorporation, whichever is earlier. Memorandum of Association must state the name of the State in which the registered office of the company is situated.

◦ This clause is important as it mentions the residence for the purpose of the communication with the company. It determines the jurisdiction of the company and also mentions the place where all the records of company are maintained. Where the company wants to change its registered office from one state to another then it can do so by passing a special resolution as well as by confirmation of Company Law Board.