INTRODUCTION TO COMPANY

Course: LLB II

Subject : Company Act

Unit: I

What is a company?

What is a company?

The term Company is used to describe an association of a number of persons, formed for some common purpose and registered according to the law relating to companies.

Lord Justice Lindley defines: "By a company is meant an association of many persons who contribute money or

money's worth to a common stock and employ it for a common purpose. The common stock so 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.“

C. Essential features:

The principal characteristics of an incorporated company can be summarised as follows:

1. Registration; 2. Voluntary Association; 3. legal personality; 4. Contractual capacity; 5. Management;6. Capital;7. Permanent existence; 8. Registered Office; 9. Common Seal;10. Limited Liability; 11. Transferability; 12. Statutory Obligations; 13. Not a citizen; 14. Residence; 15. Fundamental rights; 16. Social Objective; 17. Centrally Administrated; 18. "Lifting the veil" of the company

Features of a companyFeatures of a company

1.1. A company is considered as a A company is considered as a separate legal entityseparate legal entity from its from its members, which can conduct business with all powers to contract.members, which can conduct business with all powers to contract.

2. Independent corporate entity2. Independent corporate entity (Saloman V. Saloman) It is independent (Saloman V. Saloman) It is independent of its members and shareholdersof its members and shareholders

Other featuresOther features

3. 3. Limited Liability ( either by share or guarantee) Limited Liability ( either by share or guarantee)

4. It can own property, separate from its members. The property is 4. It can own property, separate from its members. The property is vested with the company, as it is a body corporate.vested with the company, as it is a body corporate.

5.The income of the members are different from the income of the 5.The income of the members are different from the income of the company ( Income received by the members as dividends cannot be company ( Income received by the members as dividends cannot be same as that of the company)same as that of the company)

Features continued..Features continued..

6. 6. Perpetual successionPerpetual succession: Death of the members is not the death of the : Death of the members is not the death of the company until it is wound upcompany until it is wound up

7. As it is a legal entity or a 7. As it is a legal entity or a juristic person or artificial person it can juristic person or artificial person it can sue sue and be suedand be sued

8.The company enjoys 8.The company enjoys rights and liabilitiesrights and liabilities which are not as that of the which are not as that of the members of the companymembers of the company

Theories of corporate personality and company

Theories of corporate personality and company

• Some theories of the corporation cont …

• Contractual theory: the company is a nexus of contracts between various constituencies—

shareholders, managers, creditors and employees—who have an interest in the firm. The law is

designed to allow the different parties to make and enforce various legal relations (e.g. limited

liability).

• Aggregate theory: related to contractual theory and based on the idea that individuals form

associations or aggregations to carry out some common purpose; in the case of a company it is

usually a commercial purpose.

• Political or stakeholder theory: a company is a distinct social entity, rather than the product of

private contract, and has various stakeholders, including the community itself. The company is

responsible to the whole community, not just to shareholders.

Some theories of the corporation cont …

• Communitarian theory: a company is a social institution and operates within a community. It has a responsibility to all members of the community, and is not just as a profit- making institution for the shareholders and officers of the company.

• Concession theory: sometimes referred to as privilege theory, concession theory states that a company is created by the state and the status of separate legal entity is conceded, or alternatively granted, as a privilege to a body. The company, in turn, has responsibilities and duties to society when making decisions that affect the community

The company as a legal person

• Company as separate legal entity

• A company is a separate legal entity that comes into existence at the

beginning of the day of its registration: s 119.

• A company takes the legal capacity and powers of an individual in and

outside the jurisdiction. It can issue shares and other securities, including

rights to put charges on company property: s 124.

• A company, once created, is a separate legal entity from its owners

(members), its operators (directors, officers and employees) and any other

agent who is contracted by the company.

Lifting of Corporate VeilLifting of Corporate Veil

9. As the company is 9. As the company is a separate legal entitya separate legal entity , is has been provided with , is has been provided with a veil, compared to that of individuals who are managing the a veil, compared to that of individuals who are managing the company.company.

10.But if the court feels that such veil has to been used for any 10.But if the court feels that such veil has to been used for any wrongful purposewrongful purpose, the , the courtcourt lifts the corporate veil and makes the lifts the corporate veil and makes the individual liable for such acts which they should not have done or individual liable for such acts which they should not have done or doing in the name of the companydoing in the name of the company

Circumstances to lift the Circumstances to lift the corporate veil…corporate veil…

The corporate veil can be lifted eitherThe corporate veil can be lifted eitherunder the under the • Statutory provisionsStatutory provisions or or • Judicial interpretationsJudicial interpretationsThe statutory provisions areThe statutory provisions areProvided under the CompaniesProvided under the CompaniesAct, 1956Act, 1956The other circumstances are decidedThe other circumstances are decidedthrough Judicial interpretations, whichthrough Judicial interpretations, whichare based on facts of each case as perare based on facts of each case as perthe decisions of the court.the decisions of the court.

Statutory circumstances for lifting Statutory circumstances for lifting the corporate veilthe corporate veil

• Reduction in membership- Reduction in membership- Less than seven in public company and Less than seven in public company and less than two if it is a private company less than two if it is a private company

• Failure to refund application money- Failure to refund application money- After the issue of shares to the After the issue of shares to the pubic, the company has to pay back the initial payment to the pubic, the company has to pay back the initial payment to the unsuccessful applicants (SEBI Guidelines- 130 Days), if they fail to do unsuccessful applicants (SEBI Guidelines- 130 Days), if they fail to do so, the corporate veil can be lifted.so, the corporate veil can be lifted.

• Mis-description of companies name- Mis-description of companies name- While signing a contract if the While signing a contract if the company’s name is not properly describedcompany’s name is not properly described, then the corporate , then the corporate veil can be lifted.veil can be lifted.

continuedcontinued• Misrepresentation in the prospectus- Misrepresentation in the prospectus- (Derry Vs Peek) In (Derry Vs Peek) In

case of misrepresentation, the promoters, directors and case of misrepresentation, the promoters, directors and every other person responsible in this matter can be held every other person responsible in this matter can be held liable. liable.

• Fraudulent Conduct- Fraudulent Conduct- In case the company is carried on with In case the company is carried on with an intent to defraud the creditors, then the court may lift the an intent to defraud the creditors, then the court may lift the corporate veil.corporate veil.

• Holding and subsidiary companies-Holding and subsidiary companies- A subsidiary has a A subsidiary has a distinct legal entity from the holding company other than in a distinct legal entity from the holding company other than in a few circumstances, so if otherwise shown, the court may few circumstances, so if otherwise shown, the court may under the Act , lift the corporate veil of the subsidiary under the Act , lift the corporate veil of the subsidiary company.company.

Circumstances to lift the corporateCircumstances to lift the corporateveil through judicial interpretations veil through judicial interpretations

• When the court feels that there are no statutory provisions which When the court feels that there are no statutory provisions which can pierce the corporate veil, and can pierce the corporate veil, and the identity of the company is not the identity of the company is not the one which has to exist, and the court has to interfere in order to the one which has to exist, and the court has to interfere in order to avoid the activities that are done in the name of the company by avoid the activities that are done in the name of the company by persons managing thempersons managing them, it has been empowered to do so…… , it has been empowered to do so……

The circumstances are…..The circumstances are…..

Judicial interpretations by the court are Judicial interpretations by the court are as follows:as follows:

• Protection of Revenue-Protection of Revenue- When ever a company uses its name for the When ever a company uses its name for the purpose of tax evasion or to circumvent tax obligationspurpose of tax evasion or to circumvent tax obligations

• Prevention of fraud or Improper conduct- Prevention of fraud or Improper conduct- The incorporation has been used The incorporation has been used for fraudulent purpose, like defrauding the creditors, defeating the purpose for fraudulent purpose, like defrauding the creditors, defeating the purpose of law etc..of law etc..

• Determination of the character of the company- Determination of the character of the company- Enemy company or all the Enemy company or all the members being the citizens of the enemy country. (Daimler Co. Ltd V. members being the citizens of the enemy country. (Daimler Co. Ltd V. Continental Tyre & Rubber Co. Ltd)Continental Tyre & Rubber Co. Ltd)

Other circumstancesOther circumstances

• Where a company is used to avoid welfare legislation-Where a company is used to avoid welfare legislation- If a company is formed in If a company is formed in order to avoid the benefits to the workers like bonus, or other statutory benefits..order to avoid the benefits to the workers like bonus, or other statutory benefits..

• For determining the technical competence of the company- For determining the technical competence of the company- To look into the To look into the competency of the company or the shareholders or promoters competency of the company or the shareholders or promoters

(New Horizon’s Ltd and Another V. Union of India (New Horizon’s Ltd and Another V. Union of India (1994)(1994)

Kinds of Companies

Types of CompaniesTypes of Companies

• Limited Company ( Limited by share or by guarantee)Limited Company ( Limited by share or by guarantee)• Unlimited companyUnlimited company• Government CompanyGovernment Company• Foreign CompanyForeign Company• Private CompanyPrivate Company• Public CompanyPublic Company• Holding CompanyHolding Company• Subsidiary CompanySubsidiary Company

1. Limited Company1. Limited Company

• Limited by Shares-Limited by Shares- In such companies, the liability is only the In such companies, the liability is only the amount which remains unpaid on the shares.amount which remains unpaid on the shares.

• Limited by Guarantee not having share capital-Limited by Guarantee not having share capital-In this type of In this type of companies the memorandum of Association limits the companies the memorandum of Association limits the members’ liability. It will be based on the undertaking that has members’ liability. It will be based on the undertaking that has been given in MOA for their contribution in case of a winding been given in MOA for their contribution in case of a winding up.up.

• Limited by guarantee having share capital-Limited by guarantee having share capital- In such cases , the In such cases , the liability would be based on the MOA towards the guaranteed liability would be based on the MOA towards the guaranteed amount and the remaining would be from the unpaid sums of amount and the remaining would be from the unpaid sums of the shares held by the person concerned.the shares held by the person concerned.

2. Unlimited Company 2. Unlimited Company

• There is There is no limit on the liability of the members.no limit on the liability of the members. The liability in such The liability in such cases would extend to the whole amount of the company’s debts and cases would extend to the whole amount of the company’s debts and liabilities.liabilities.

• Here the Here the members cannot be directly sued by the creditorsmembers cannot be directly sued by the creditors..• When the company is wound up, the official liquidator will call upon When the company is wound up, the official liquidator will call upon

the members to discharge the liability.the members to discharge the liability.

• The details of the number of members with which the company is The details of the number of members with which the company is registered and the amount of share capital has to be stated in the registered and the amount of share capital has to be stated in the Articles of Association (AOA).Articles of Association (AOA).

3. Government Company3. Government Company

• When When 51%51% of the paid up share capital is held by the of the paid up share capital is held by the government.government.

• The share can be held by the The share can be held by the central government or state central government or state governmentgovernment. Partly by central and partly by two or more . Partly by central and partly by two or more governments.governments.

• As the legal status of the company does not change by As the legal status of the company does not change by being a government company, there are no special being a government company, there are no special privileges given to them.privileges given to them.

4. Foreign Company4. Foreign Company

• A company incorporated outside India, but A company incorporated outside India, but having a place of having a place of business in Indiabusiness in India..

• If it does not have a place of business in India but only has agents in If it does not have a place of business in India but only has agents in India it cannot be considered to be foreign company. India it cannot be considered to be foreign company.

5.Private Company5.Private Company

• A company which has a A company which has a minimum of two personsminimum of two persons. They have to subscribe to . They have to subscribe to the MOA and AOAthe MOA and AOA

• It should be have a It should be have a minimum paid up capital of 1 lakh or moreminimum paid up capital of 1 lakh or more as prescribed as prescribed by the article.by the article.

• The maximum number of members to be fiftyThe maximum number of members to be fifty ( it does not include members ( it does not include members who are employed in the company, persons who were formerly employed)who are employed in the company, persons who were formerly employed)

• The The rights to transfer the shares are restrictedrights to transfer the shares are restricted in the Private companies (1) in the Private companies (1)

• Prohibits any invitation to the public to subscribeProhibits any invitation to the public to subscribe and therefore it cannot and therefore it cannot issue a prospectus inviting the public to subscribe for any shares in, or issue a prospectus inviting the public to subscribe for any shares in, or debentures of the companydebentures of the company

• It It prohibits acceptance of depositsprohibits acceptance of deposits from persons other than its members, from persons other than its members, directors or their relatives.directors or their relatives.

• If If two or more are holding one or more sharestwo or more are holding one or more shares in a company in a company jointly,jointly, they they shall for the purpose of this definition, be treated as shall for the purpose of this definition, be treated as a single member.a single member.

• As there is As there is no public accountabilityno public accountability like a public company, there is like a public company, there is no no rigorous surveillance.rigorous surveillance.

Exemption and Privileges of a Private companyExemption and Privileges of a Private company

• It can have a It can have a minimum of two members.minimum of two members.• It can It can commence business immediatelycommence business immediately after obtaining certificate of after obtaining certificate of

incorporation.incorporation.• It need It need not issue prospectusnot issue prospectus or statement in lieu of prospectus. or statement in lieu of prospectus.• It can have a It can have a minimum of 2 directors.minimum of 2 directors.• It It need not hold statutory meetingneed not hold statutory meeting or file statutory report with the or file statutory report with the

ROC.ROC.

6. Public Company6. Public Company

• A Public company means a company-A Public company means a company- > Which is > Which is not a private companynot a private company > Which has a > Which has a minimum paid-up capital of Rs 5 lakhs or such minimum paid-up capital of Rs 5 lakhs or such

higher paid-uphigher paid-up capital, as may be prescribed capital, as may be prescribed > Which is > Which is a private company and is a not a subsidiary ofa private company and is a not a subsidiary of a a

company, which is company, which is private company. private company. >It includes- any company which is a public company with a paid >It includes- any company which is a public company with a paid

up capital of less than 5 lakhs, then it has to up capital of less than 5 lakhs, then it has to enhance its paid up enhance its paid up capital as per the statutory requirement (2)capital as per the statutory requirement (2)

Minimum no. of Directors in case of a public company is 3.

Conversion of CompanyConversion of Company• The Act provides for The Act provides for conversion of public company into a private conversion of public company into a private

company and vice versacompany and vice versa• A private company is converted into a public company either A private company is converted into a public company either by by

default or by choicedefault or by choice in compliance with the statutory requirements. in compliance with the statutory requirements. • Once the action for conversion takes place then, Once the action for conversion takes place then, a petition can be a petition can be

filed with the central government with the necessary documents for filed with the central government with the necessary documents for its decision on the matter of conversionits decision on the matter of conversion

7. holding company

• A holding company is a company or firm that owns other companies' outstanding stock. The term usually refers to a company that does not produce goods or services itself; rather, its purpose is to own shares of other companies to form a corporate group. Holding companies allow the reduction of risk for the owners and can allow the ownership and control of a number of different companies.

• In the United States, 80% or more of stock, in voting and value, must be owned before tax consolidation benefits such as tax-free dividends can be claimed. That is, if Company A owns 80% or more of the stock of Company B, Company A will not pay taxes on dividends paid by Company B to its stockholders, as the payment of dividends from B to A is essentially Company A switching cash from one of its pockets to another. Any other shareholders of Company B will pay the usual taxes on dividends, as they are legitimate and ordinary dividends to these stockholders. (3)

8. Subsidiary companies

• Definition

• A subsidiary is a company that has been set up or acquired by another company that is usually either larger or better-known to the public as a result of its longevity or reputation. The acquiring company is called the parent corporation. If a parent corporation exists strictly to hold stock in other entities, it is referred to as a holding company. (4)

Subsidiary companies

• Ownership• In a subsidiary situation, the parent corporation owns more than 50

percent of the voting stock of each of the companies it acquires. If it holds all of the voting stock, the smaller entity is said to be a wholly owned subsidiary. Parents and their subsidiaries are separate legal entities insofar as liability issues but sometimes file their financial statements as a single unit. Ownership of 80 percent or more of a subsidiary's stock is required for the parent corporation to submit consolidated tax returns.

Registration and incorporation of the company

Steps for formation of a company

• Types of Company • Availability of Name• The Memorandum and Articles of Association duly signed, and

stamped.• The agreement, if any with any individual for appointment as its

Managing or whole-time director.• Consent of directors in Form 29. • Notice of Registered address in Form 18 to be given within 30 days of

the date of incorporation.• Particulars of Directors in Form 32.

Steps for formation of a company

• Payment of Registration Fees.

• Power of attorney, to fulfill various legal and other formalities.

• Statutory Declaration in Form No. 1 that all requirements of the Companies Act and the rules thereunder have been complied with.

• The declaration should be made by either an advocate of Supreme Court / High Court, a practicing Chartered Accountant or a director, or a manager or a secretary named in the Articles of the proposed company. [Section 33 (2)]

Registration and IncorporationRegistration and Incorporation• Association of persons or partnership or more than Association of persons or partnership or more than 20 members ( 10 in 20 members ( 10 in

case of banking) can register to form a company under the Companies case of banking) can register to form a company under the Companies Act, 1956Act, 1956

• If they do not register they can be considered to be illegal association. If they do not register they can be considered to be illegal association. The contract entered into by this illegal association is The contract entered into by this illegal association is void and cannot void and cannot be validated. be validated. Its illegality will Its illegality will not affect its tax liability or its not affect its tax liability or its chargeabilitychargeability

• The certification of incorporation is the conclusive evidence, that all the The certification of incorporation is the conclusive evidence, that all the requirements for the registration have been complied with it.requirements for the registration have been complied with it.

Incorporation of a CompanyIncorporation of a Company• The persons who The persons who conceive an ideaconceive an idea of a company decide and do the of a company decide and do the

necessary work for formation of a company are called the necessary work for formation of a company are called the promoterspromoters of of the Company.the Company.

• The Promoters are the persons who decide on the The Promoters are the persons who decide on the formation of the formation of the company.company.

• The promoters of a company stand undoubtedly in a The promoters of a company stand undoubtedly in a fiduciary positionfiduciary position though they are not the agent or a trustee of a company. They are the though they are not the agent or a trustee of a company. They are the ones “who create and mould the company”. ones “who create and mould the company”.

• They may have to enter into They may have to enter into pre-incorporation contractspre-incorporation contracts , which can be , which can be validated after the incorporation of the company for obtaining certificate of validated after the incorporation of the company for obtaining certificate of incorporation.incorporation.

References

• 1.www.property118.org• 1a.http://www.mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf

Pg:18

2.http://www.mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf Pg: 18

• 3.http://www.mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf Pg:38

• 4.http://www.mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf Pg:38

• http://www.mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf

Thank You