Introduction to Companies Law

How are Laws made in our country ?

The basic function of the parliament is to make laws
Bill is a draft that is prepared
A bill goes through three readings
A bill might also be referred to the Select or Joint Committee
A bill becomes an Act when it is approved by both houses of the parliament and receives the assent of the president.

COMPANIES ACT 2013

Company law in India has its origin from the English Company Law.
The first legislation in India related to companies was passed in the year 1850 based on the English Company Act 1844.
Prior to the Companies Act 2013, the Companies Act 1956 was in existence.

HISTORY OF THE CORPORATE LEGISLATION IN INDIA

Joint Stock Company Act 1850
Joint Stock Company Act 1857
Joint Stock Companies Act 1860
Joint Stock Companies Act 1866
Companies Act 1913
Companies Act 1936
Companies Act 1956
Companies Act 2013
2005 Irani Committee report headed by Dr. JJ. Irani(Dr. Jamshed Jiji Irani), who was the director of Tata Group, played an instrumental role in the drafting of the current Companies Act 2013.
The report recommended a shift from Government Approval

Regime to a shareholder Approval and Disclosure Regime.

HISTORY OF THE COMPANIES ACT 2013

The Companies Act 2013 received the assent of the president on 29th August 2013.
The Companies Act 2013 was amended various times.
The Ministry of Corporate Affairs (MCA) is responsible for the administration of the Companies Act.
MCA will issue circulars and notifications from time to time.
The Companies Act is divided into 29 chapters.
The Companies Act 2013 contains 470 sections and seven schedules.
The Act extends to the whole of India.

REFORMS BROUGHT BY THE COMPANIES ACT 2013

A modern legislation for growth and regulation of the corporate sector in India.
Facilitate business-friendly corporate regulations and improve corporate governance norms.
Corporate Social Responsibility
Women Director
Rotation of Auditors
The Companies Act 2013 aims to improve the Ease of Doing Business

WHAT IS A COMPANY?

Company is derived from the Latin word ‘Com’ which means together and ‘panis, which means bread. Therefore it literally means an association of persons who took their meals together.
A company is a voluntary association of persons formed for some common purpose, with capital divisible into parts known as shares.
According to section 2(20) of the Companies Act 2013, ” a company means a company incorporated under this Act or under any previous company law.”
A company is called a corporate body because the persons composing it are made into one body by incorporating it according to the law and clothing it with legal personality.
Lord Justice Lindley has defined a company as “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 arising there from. The common stock so contributed is denoted in money and is the capital of the company.The persons who contributed it, or to whom it belongs, are members. The proportion of capital to which each member is entitled is his share. The shares are always transferable, although the right to transfer them may be restricted.

CHARACTERISTICS OF A COMPANY

1. CORPORATE PERSONALITY OR SEPARATE LEGAL ENTITY

A company incorporated under the Act has a corporate personality, the company has its own name and acts under its name.
The company is distinct from the members who compose it.
The assets of the company are separate and distinct from the members of the company.
A company can own property in its name, borrow, money, incur debts, employ people, enter into contracts, can sue or be sued in its name
A shareholder cannot be held accountable for the acts of the company even if the shareholder holds the entire share capital.

CASE LAW: SALOMON vs SALOMON

Salomon was a successful boot manufacturer running a sole trading concern.
Later, his sons got interested in running the concern, so Salomon decided to incorporate his sole trading business into a company.
Salomon took 23,000 shares and 10000 debentures of the company.
Due to certain reasons, the company was wound up
The assets of the company were worth 6050 and total liabilities worth 18000.
Out of the liabilities, 10000 was due to the debenture holder, which was acquired by Salomon, and the remaining 8000 was to trade creditors or unsecured creditors
The trade creditors or unsecured creditors claimed that they should be paid in priority because Salomon and the company are one.
The House of Lords declared that As soon as the company was incorporated, the company became a separate person independent from Salmon. Salmon was a good creditor of the company as any other creditor was therefore, as a secured creditor, Salmon is entitled to repayment in priority to unsecured creditors.
A member can, therefore, be both a shareholder and creditor simultaneously.

2. LIMITED LIABILITY

A company may be

Company limited by shares
Company limited by guarantee
In a company limited by shares, the liability of the members is limited to the unpaid value of shares.
Example: If the face value of the share is Rs.10 and a member has already paid Rs.7 per share, then the member can be called upon to pay not more than Rs. 3 per share.
In a company limited by guarantee, the liability of the members is limited to such amount as the members may undertake to contribute to the assets at the event of the winding up of the company.

3. PERPETUAL SUCCESSION

A company is created by the process of law and can only be put to end by the process of law.
A company is not affected by the insolvency or retirement of the members.
Perpetual succession means the ability of a company to maintain its existence by the succession of new individuals who step into the shoes of those who cease to be members of the company.
Professor L.C.B. Gower rightly mentions, “Members may come and go, but the company can go on forever. During the war all the members of one private company, while in general meeting, were killed by a bomb, but the company survived, not even a hydrogen bomb could have destroyed it”

4. TRANSFERABILITY OF SHARES

The capital of the company is divided into parts called shares.
The shares are freely transferable, subject to a certain condition, so that no shareholder is permanently wedded to the company.
Shares are movable property.
A member may sell his shares in the open market and realise the money invested by him.

5. SEPARATE PROPERTY

Company is a legal person distinct from its members and hence capable of owing enjoying and disposing property in its own name.
Although the capital and the assets of the company are contributed by its shareholders they are not the owners of the property of the company.

CASE LAW : Mrs. BACHA F. GUZDAR V. THE COMMISSIONER OF INCOME TAX

B is a shareholder of a agricultural company dealing in tea. B received dividend from an agricultural company.
As per the Income Tax Act, income generated from agricultural activity specifically for tea has to pay only 40% of the income as tax remaining 60% is exempt.
B claimed that she will not pay as tax on the dividend income as dividend is received from an agricultural company.
The supreme court held that even though the income of tea company is exempted up to 60%, the same income received by a shareholder in the form a dividend is not considered as agricultural income.

6. CAPACITY TO SUE

A company can sue and be sued in its corporate name.
To sue means to institute a legal proceeding against a person.
All legal proceedings against the company are to be instituted in its name.

7. VOLUNTARY ASSOCIATION FOR PROFIT

A company is a voluntary association for profit.
A company is formed for the accomplishment of certain goods.
The profit gained is divided among the shareholders or retained for future expansion.

8. COMMON SEAL

Since the company does not have a physical existence, it acts through agents.
The common seal acts as the official signature of the company.
The contracts entered by its agents must be under the common seal of the company.

9. COMPANY NOT A CITIZEN

Though the company is legal person, it is not a citizen as per the Citizenship Act 1955.

CASE LAW : STATE TRADING CORPORATION Vs C.T.O. A.I.R

The supreme court held that though State trading corporation is a legal person but it is not a citizen.
However certain fundamental rights enshrined in the constitution such as right to equality are also available for companies.
Citizenship Act, 1955 expressly excludes a company, association or body of individuals from citizenship.

LIFTING OF CORPORATE VEIL

A company is a legal person distinct from its members.
The effects of this principal is that there is a fictional veil between the company and its members.
When companies using this veil of corporate personality for fraud or improper conduct the court will break through or lift the corporate veil.
Where fraudulent activity is done, the individuals involved will not be allowed to take shelter under the corporate veil.
The court will not consider the company and members separately. The members will be liable for the actions committed.

INSTANCES WHERE THE CORPORATE VEIL HAS BEEN LIFTED

1. PREVENTION OF FRAUD OR IMPROPER CONDUCT

When the corporate veil has been used for commission of fraud or improper conduct. In such a situation, courts have lifted the veil and looked at the realities of the situation.

CASE LAW : JONES Vs LIPMAN

L agreed to sell a particular price of land to J.
L subsequently changed his mind and to avoid specific performance of contract L constitutes a company and sells the land to the company
The company was just formed with 2 members Mr. L and a clerk.
J brought an action for specific performance against L and the company.
The court looked into the reality of the situation and ignored the transfer and ordered that company should transfer the land to J.

2. TO PREVENT EVASION OF TAXES

When a company was formed was to evade taxes the court will ignore the concept of separate entity and make the individuals concerned liable to pay the taxes.

CASE LAW: SIR DINSHAW MANECKJEE PETIT AIR 1927

Mr. D was a millionaire earning huge income by way of dividends and interest.
He formed 4 private companies and transferred the income to the companies.
The income was given back to Mr. D in the form of a loan.
It was held that the company had been formed by Mr. D only as a means to evade tax.
The corporate veil of the company was lifted.

3. PROTECTION OF PUBLIC POLICY

The court will lift the corporate veil to protect the public policy and prevent transactions contrary to public policy.

4. DETERMINATION OF ENEMY CHARACTER OF A COMPANY

A company may assume enemy character when the persons in the control of its affairs are residents of the enemy country. The court may lift the corporate veil to examine the character of the persons who control the company and declare the company enemy company.

CLASSIFICATION OF THE COMPANIES

On the basis of Formation
On the basis of Liability
On the basis of Membership
On the basis of Control
On the basis of Place
Other Classification

CLASSIFICATION OF COMPANY

1. On the basis of Formation Of Company It is classified into:-

Statutory Company
Chartered Company
Registered Company
Statutory Company
A company which is incorporated by the means of specific act of the parliament or any state legislature. These are governed by acts creating them.
In such type of companies MOA and AOA is not required and annual reports are presented in parliament.**
Chartered Company
Companies created by specific charter by monarch (head of states), the powers of chartered companies is defined by the charter (a document to incorporate institution) under which it is incorporated.
Example: east India company, bank of England. (not exist in India).
Registered Company
Companies registered under Companies Act 2013 or earlier act are registered companies. Such companies cannot come into existence until it is registered and certificate of incorporation has been granted by registrar.

2. On the basis of Liability of Members It is classified into:-

Limited by Shares
Limited by Guarantee
Unlimited Liability
Limited by Shares
These types of company is have a share capital and the liability of each member or the company is limited by the memorandum to the extent of face value of share subscribed to by him. Such company is called limited by share A company limited by share may be public or private company.
Limited by Guarantee
These types of companies may or may not have a share capital. Each member promise to pay a fixed sum of money specified in the memorandum in the event of liquidation of the company for payment of the debt and liabilities of the company. These amount promised by him is called guarantee.
Unlimited Liability
Section 2(92) of companies Act. 2013 gives option to promoters to form a company with unlimited liability. A company not having any limit on the liability of its member is called an unlimited company. An unlimited company may be public or private company.

3. Classification of Companies based on Membership Pattern

Private Company:-
1. One - Person Company
2. Small Company
Public Company

PRIVATE COMPANY [SECTION2(68)]
Restricts the right to transfer the share.
Limits the number of persons to 200.
Prohibits any invitation to the public to subscribe to any securities of the company.
A company whose shares are not traded publically
Minimum no. of members of a private company is 2
The requirement of Rs. 1, 00,000 or more as minimum paid-up share capital for private companies has been omitted by the Companies (Amendment) Act 2015.
While calculating the maximum no of members as 200:-
Joint holders of shares are treated as single-member
Employees and Ex-employees will not be included in the no. of members
ONE PERSON COMPANY [SECTION2(62)]
Introduced newly by the Companies Act 2013.
OPC means a company with one member.
OPC is registered as a private company with one member and one director.
OPC form of company was recommended by the 2005 Dr. JJ Irani Committee.
FEATURES OF ONE PERSON COMPANY
It is incorporated as a private limited company which can be formed either as a company limited by shares or guarantee.
It can have only one member who is a citizen and resident of India.
The words one person company must be mentioned in brackets below the name of the company.
The name of the nominee to be provided in the event of death or incorporation.
A single person is entitled to incorporate a maximum of one OPC.
One person would constitute the Board of Directors.
OPC cannot be formed as a Section 8 company or a non-banking financial company.
No minor shall become member or nominee of the One Person Company or hold share with beneficial interest.
No OPC can convert voluntarily into any kind of company unless 2 years have expired from the date of incorporation, except in cases where capital or turnover threshold limits are reached.
SMALL COMPANY

Section 2(85) and Rule 2(1)(t) of the Companies (Specification of Definitions Details) Rules, 2014, with effect from 15th September 15, 2022, defines small companies.

A company, other than a public company.
Paid-up share capital of which does not exceed 4 Crore rupees or such higher amount as may be prescribed, which shall not be more than 10 crore rupees;
turnover of which as per profit and loss account for the immediately preceding financial year does not exceed 40 crore rupees or such higher amount as may be prescribed, which shall not be more than 100 crore rupees.
Prior to 1st April 2021 the following were the limits of small companies.
- Paid up Capital of which does not exceed 50 Lakhs rupees or much higher amount as may be prescribed, which shall not be more than 10 crore rupees; and
- Turnover of which as per profit and loss account for the immediately preceding financial year does not exceed 2 crore rupees or such higher amount as may be prescribed, which shall not be more than 100 crore rupees.
A small company cannot be a
Holding or subsidiary company
Section 8 company
Company or a corporate body governed by a special act.
PUBLIC COMPANY SECTION 2(71)
Public company is not a private company.
The minimum paid up capital of public company is 5,00,000 lakhsMinimum number of members is 7.
There is no maximum limit for the no. of members.
Public company has to invite the public to subscribe the shares of the company.

CLASSIFICATION ON THE BASIS OF CONTROL

Holding Company
Subsidiary Company
Associate Company
Government Company

HOLDING COMPANY Section 2(46)

A company which controls another company is known as holding company.

SUBSIDIARY COMPANY Section 2(87)

Subsidiary company means a company in which the holding company :

Controls the composition of board of directors
Exercises or controls more than one half of the voting power.

ASSOCIATE COMPANY Section 2(6)

A company in which, another company has a significant influence but which is not a subsidiary company.
The expression significant influence means control of at least 20% of total voting power or control of or participation in the business decisions.

GOVERNMENT COMPANY Section 2(45)

Company in which not less than fifty-one percent of the paid-up share capital is held by the Central Government, or by any State Government.
or partly by the Central Government and partly by one or more State Governments.
and includes a company which is a subsidiary company of such a

Government company.

CLASSIFICATION OF COMPANY ON THE BASIS OF PLACE OF REGISTRATION

FOREIGN COMPANY Section 2(42)

A company or a body corporate incorporated outside India, which:-
Has a place of business in India whether by itself or through an agent, and carries on business physically or through electronic mode.
Conduct any business activity in India in any other manner.

Foreign companies must follow the rules and guidelines laid down by the companies Act, 2013, the companies (Registration of Foreign Companies) Rules, 2014, RBI guidelines and the FEMA Act.

INDIAN COMPANY

Companies that are registered in India
Indian Companies are registered any the following procedure mentioned in the Companies act 2013, or the previous act.

OTHER CLASSIFICATIONS Producer Company

Dormant Company

Section 8 Company

PRODUCER COMPANY

A company, which has the objective of production, harvesting, procurement, grading, pooling, handling, marketing, selling, and export of primary produce of the members or import of goods or services for their benefit.

DORMANT COMPANY

Formed for a future project or to hold an asset or intellectual property.
The company has no significant transaction or its an inactive company
Such a company can make an application to the Registrar for obtaining the status of a dormant company.

SECTION 8 COMPANY OR ASSOCIATION NOT FOR PROFIT

The central government grants permission to charitable or other company to be registered as a limited company under section 8.

CONDITIONS FOR GRANT OF LICENCE BY CENTAL GOVERNMENT FOR SECTION 8 COMPANIES

1.Has in its objects of promotion of commerce, research, social welfare, art, science, sports, education, religion, charity, protection of environment or any other such objects

2.Intends to apply its profits, if any, or other income in promoting its objects.

3.Intends to prohibit the payment of any dividends to its members.

ILLEGAL ASSOCIATION (Section 464)

Any company or association of persons or partnership in which the number of members is more than 50,
and carries on business for profit,
if the company or association is not registered under any Act, then it

will be called an illegal association.

COMPANY FORMATION

PROMOTION

Before a company is formed, certain preliminary decisions are necessary
All these decisions are taken by persons known as promoters.
The first persons who control the affairs of the company are promoters

STEPS IN FORMATION OF A COMPANY

1. APPLICATION OF AVAILABILITY OF NAME

The application of name should be made in form INC 1 along with prescribed fees.
six names are to be given.
The proposed name should not resemble the name of any other already registered company.
The name should not violate the provisions of the Emblems and Names Prevention of Improper Use Act of 1950.
The name has to be approved by the Registrar of Companies.

2. PREPARATION OF DOCUMENTS

Documents like Memorandum of Association and Articles of Association must be prepared.
After the preparation of MOA and AOA the documents must be stamped with the appropriate stamp duty.

3. FILING OF DOCUMENTS

The MOA and AOA duly signed by the subscribers should be filed with the Registrar of Companies. (ROC)

4. DECLARATION OF PROFESSIONALS

Requires filing of an affidavit in the prescribed form by the advocate, CA, Cost Accountant, or a Company Secretary in practice who is engaged in forming a company.
The affidavit is filed in form INC 8
Affidavit: a written statement confirmed by oath or affirmation for using as evidence in court.

5. AFFIDAVIT FROM SUBSCRIBERS TO MEMORANDUM

Requires filing of an affidavit from the subscribers to the memorandum and persons named as first directors, if any, in the articles.
The affidavit should confirm that all the documents submitted to the registrar for incorporation are correct, complete, and true.
The affidavit should be submitted in form INC 9

6. VERIFICATION OF REGISTERED OFFICE

A company shall, within thirty days of its incorporation, have a registered office capable of receiving and acknowledging all communications and notices as may be addressed to it.
The company shall furnish to the registrar within 30 days the verification of the registered office.
The verification of the registered office is filed in form INC 22

7. PARTICULARS OF SUBSCRIBERS

Requires the filing of the particulars of name, including surname or family name, residential address, nationality, and other particulars of every subscriber to the memorandum along with proof of identity.

8. PARTICULARS OF FIRST DIRECTORS

Requires filing of the particulars of the persons mentioned in the articles as the first directors of the company, their names, including surnames or family names, the Director Identification Number, residential address, nationality and such other particulars including proof of identity as may be prescribed
The first director has to give consent to act as directors in form DIR 2.

9. CERTIFICATE OF INCORPORATION

Registrar, on the basis of documents and information filed, shall register all the documents and information in the register and issue a certificate of incorporation
From the date of incorporation mentioned in the certificate of incorporation, the entity is formed as a company by the name provided in the MOA
A Certificate of Incorporation shall be conclusive evidence that all the requirements of the Act have been complied with regarding registration
The validity of the registration cannot be questioned after the issue of the certificate.
Registrar shall allot to the company a corporate identity number, which shall be a distinct identity for the company and which shall also be included in the certificate.
The Certificate of Incorporation issued in Form INC-11 as per Companies (Incorporation) Rules, 2014

MCA- 21: ELECTRONIC FILING OF FORMS

The physical filing of all forms has been discontinued and converted

into electronic filing
The project is termed as MCA-21.
The project became fully operational from 15-9-2006.
MCA-21 covers registration and incorporation of new companies, filing of annual returns and balance sheets, filing of forms, etc.

SPICE : SIMPLIFIED PROFORMA FOR INCORPORATING COMPANY ELECTRONICALLY

SPICe is a new initiative of MCA
SPICe form or INC 32 helps a company to incorporate a company with a single
application for name reservation and incorporation of a company.

PROMOTER

According to the Companies Act, a is a person

Who has been named in the prospectus or identified by the company in the annual return.
Who has control over the affairs of the company, directly or indirectly, whether as a sharehOlder, director or otherwise.
In accordance with whose advice, directions, or instructions the Board of Directors of the company is accustomed to act.

LEGAL POSITION OF A PROMOTER

A promoter is neither an agent nor a trustee of the company.
Promoter is not an agent because there is no existence of a principal as the company is not incorporated.
A promoter occupies the peculiar position of a quasi-trustee declared in the case Valli P Rao Vs Sri Ramanuja Ginning and Rice Factory,
A promoter stands in a fiduciary relation to the company. declared in the case Erlanger Vs Sombrero Phosphate Company

Q) Why is promoter not an agent?

The fiduciary position of the promoter means

Promoter should not make any profit at the expense of the company.
To give the benefit of negotiations to the company. For example, when the promoter purchases a property and sells it to the company, the promoter should not sell the property at a higher price to the company.
The promoter should make full disclosure of interest or profit.
Not to make an unfair use of the position

PRE INCORPORATION OR PRELIMNARY CONTRACTS

The promoters of the company may enter into contracts to acquire some property or right for the company which is yet to be incorporated.
Such contracts are known as pre-incorporation or preliminary contracts
The company is not liable for the acts of the promoters done before the incorporation. The promoter is personally liable for preliminary contracts.

LIMITED LIABILITY PARTNERSHIP (LLP)

A form of business that gives the benefits of limited liability company and the flexibility of a partnership.
LLP is formed and resisted under the Limited Liability Partnership Act 2008.

FEATURES OF LLP

LLP is a body corporate and legal entity separate from its partners.
LLP has perpetual succession.
The partners of LLP have limited liability.
A basic difference between an LLP and a company lies in the internal governance structure.
LLP is governed by a contractual agreement between partners.

A company is regulated by the statute Companies Act 2013, whereas an LLP is regulated by the LLP Act 2008.

ADMINISTRATION OF COMPANIES ACT 2013

NATIONAL COMPANY LAW TRIBUNAL (NCLT)

NCLT is a quasi-judicial body.
It is established under the Companies Act 2013 under section 40
It was set up on 1 June 2016.
NCLT is a specialised court for corporates in India
NCLT will reduce the multiplicity of litigation before different forums and courts.
NCLT has multiple branches.

POWERS OF NCLT

De-registration of Companies.
Declare the liability of members unlimited.
Power to freeze assets of the company.

Power to impose restriction on any securities of the company. Conversion of public company into private company

NATIONAL COMPANY LAW APPELLATE TRIBUNAL (NCLAT)

Appeal from the order of NCLT can be raised to the National Company Law Appellate Tribunal.
Appeals can be made by any person aggrieved by an order or decision of the NCLT.
An appeal has to be made within a period of 45 days from the date on which a copy of the order or decision of the NCLT.
On the receipt of an appeal from an aggrieved person, the Appellate Tribunal would pass such orders, after giving an opportunity of being heard, as it considers fit, confirming, changing, or setting aside the order that is appealed against.
The Appellate Tribunal is required to dispose the appeal within a period of six months from the date of the receipt of the appeal.
NCLAT is constituted under Section 410 of the Companies Act 2013.
NCLT : Adjudicating Authority
NCLAT : Appellate Authority
Supreme Court : Final Authority