Company Law

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Introduction
A company is a corporate body and a legal person having status and personality distinct and
separate from the members constituting it. It 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.

The word 'corporation' is derived from the Latin term 'corpus' which means 'body'.
Accordingly, 'corporation' is a legal person created by a process other than natural birth. It is,
for this reason, sometimes called an artificial legal person. As a legal person, a corporation can

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enjoy many of the rights and incurring many of the liabilities of a natural person.

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An incorporated company owes its existence either to a special Act of Parliament or to

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company law. Public corporations like Life Insurance Corporation of India, SBI etc., have been

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brought into existence by special Acts of Parliament. In contrast, companies like Tata Steel
Ltd., and Reliance Industries Limited have been formed under the company law i.e. Companies

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Act, 1956 which is being replaced by the Companies Act 2013.

Definition of Company:

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In the legal
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sense, a company is an association of both natural and artificial persons (and is

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incorporated under the existing law of a country). In terms of the Companies Act, 2013 (Act
No. 18 of 2013) a "company" means a company incorporated under this Act or any previous
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Company Law (Sec 2(20)).
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In common law, a company is a "legal person" or "legal entity" separate from, and capable of
surviving beyond the lives of its members. However, an association formed not for profit also
acquires a corporate character and falls within the meaning of a company because of a license
issued under Sect

The most 9Mstriking

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(i) Corporate Personality
A company incorporated under the Act is vested with a corporate personality so it redundant
bears its name, acts under a name, has a seal of its own and its assets are separate and distinct
from those of its members. It is a different 'person' from the members who compose it.
Therefore it can own property, incurring debts, borrowing money, having a bank account,
employing people, entering into contracts and suing or being sued in the same manner as an
individual.

The principle of a separate legal entity of a company was recognized in the case of Salomon
v. Salomon and Co. Ltd (1897) A.C 22, which stated that a company has a separate existence
from its members. Thus, this concept protects the shareholders from being personally liable for
any wrong or obligations of the company.

(ii) Limited Liability

Limited Liability is of two kinds i.e. liability limited by the unpaid amount of shares and

liabilities of the shareholders in the company.

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liability limited up to the amount guaranteed in the memorandum. These are the limited

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The privilege of limited liability for business debts is one of the principal advantages of doing
business under the corporate form of organization. The company, being a separate person, is
the owner of its assets and bound by its liabilities.

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(iii) Perpetual Succession

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An incorporated company never dies, except when it is wound up as per law. A company, being
a separate legal person
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is unaffected by death or departure of any member and it remains the
same entity, despite the total change in the membership.

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A company's life is determined by the terms of its Memorandum of Association.

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It may be perpetual, or it may continue for a specified time to carry on a task or object as laid
down in the Memorandum of Association.

(iv) Separate Property

A company is a legal person and entirely distinct from its members, is capable of owning,
enjoying and disposing of property in its own name. The company is the real person in which
all its property is vested, and by which it is controlled, managed and disposed of.

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3L7N9QLordships of the Madras High Court in R.F. Perumal v. H. John Deavin, A.I.R. 1960
Mad. 43 held that "no member can claim himself to be the owner of the company's property
during its existence or in its winding-up".

(v) Transferability of Shares

The capital of a company is divided into parts, called shares. The shares are said to be movable
property and, subject to certain conditions, freely transferable, so that no shareholder is
permanently or necessarily wedded to a company.

When the joint-stock companies were established, the object was that their shares should be
capable of being easily transferred, [In Re. Balia and San Francisco Rly., (1968) L.R. 3 Q.B.
588].

(vi) Common Seal

Upon incorporation, a company becomes a legal entity with perpetual succession and a
common seal. Since the company has no physical existence, it must act through its agents and

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all contracts entered into by its agents must be under the seal of the company. The Common
Seal acts as the official signature of a company. The name of the company must be engraved

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on its common seal.

(vii) Capacity to sue or be sued

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A company is a body corporate, can sue and be sued in its own name. To sue means to institute

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legal proceedings against (a person) or to bring a suit in a court of law.

or the personality of the

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A company's right to sue arises when some loss is caused to the company, i.e. to the property
company. Hence, the company is entitled to sue for damages in libel

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or slander as the case may be [Floating Services Ltd. v. MV San Fransceco Dipaloa (2004)
52 SCL 762 (Guj)].

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IV. Distinction between Company and Partnership
The principal points of distinction between a company and a partnership firm are as follows:

1. A company is a distinct legal person. A partnership firm is not distinct from the several
persons who form the partnership.

2. In a partnership, the property of the firm is the property of the individuals comprising
it. In a company, it belongs to the company and not to the individuals who are its
members.
3. Creditors of a partnership firm are creditors of individual partners and a decree against
the firm can be executed against the partners jointly and severally.

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4. Partners are the agents of the firm, but members of a company are not its agents. A

of the firm's business.

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partner can dispose of the property and incur liabilities as long as he acts in the course

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

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6. A partner cannot transfer his share and make the transferee a member of the firm

transferred.

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without the consent of the other partners, whereas a company's share can ordinarily be

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Section 3 (1) of the Companies Act 2013 states that a company may be formed for any lawful

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seven or more persons, where the company to be formed is to be a public company;

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two or more persons, the company to be formed is to be a private company; or

• 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.

I. Types of Company on the basis of Incorporation

There are three ways in which companies may be incorporated.
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a. Statutory Companies: These are constituted by a special Act of Parliament or State
Legislature. The provisions of the Companies Act, 2013 do not apply to them.
b. Registered Companies: The companies which are incorporated under the Companies
Act, 2013 or under any previous company law, with ROC fall under this category.
II. Types of Company on the basis of Liability
Under this category there are three types of companies:

a. Unlimited Liability Companies: In this type of company, the members are liable for
the company’s debts in proportion to their respective interests in the company and their
liability is unlimited.
b. Companies limited by guarantee: A company that has the liability of its members
limited to such amount as the members may respectively undertake, by the
memorandum, to contribute to the assets of the company in the event of its being
wound-up, is known as a company limited by guarantee.
c. Companies limited by shares: A company that has the liability of its members limited

them is termed as a company limited by shares.

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by the memorandum to the amount, if any, unpaid on the shares respectively held by

• Private Company

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As per Section 2(68) of the Companies Act, 2013, “private company” means a company having

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a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as

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may be prescribed[omitted by Companies (Amendment) Act, 2015 ],

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restricts the right to transfer its shares;

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• except in the case of One Person Company, limits the number of its members to two
hundred:

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Provided that where twotr-or more persons
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shall, for the purposes of this definition, be treated as a single member.

The words ‘Private Limited’ must be added at the end of its name by a private limited company.
As per section 3 (1), a private company may be formed for any lawful purpose by two or more
persons by subscribing their names to a memorandum and complying with the requirements of
this Act in respect of registration.

• One Person Company (OPC)

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With the implementation of the Companies Act, 2013, a single person could constitute a
Company, under the One Person Company (OPC) concept.
The Companies Act, 2013 has done away with redundant provisions of the previous Companies
Act,1956, and provides for a new entity in the form of one person company (OPC), while
empowering the Central Government to provide a simpler compliance regime for small
companies. Prior to the new Companies Act, 2013 coming into effect, at least two shareholders
were required to start a company. But now the concept of One Person Company (OPC) would
provide tremendous opportunities for small businessmen and traders

• Small Company
As recommended by the Dr JJ Irani Committee, the concept of small companies has been
introduced in the Companies, Act, 2013.

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The Committee sees no reason why small companies should suffer the consequences of
regulation that may be designed to ensure balancing of interests of stakeholders of large, widely
held corporates.

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As per section 2(85) ‘‘small company’’ means a company, other than a public company,—

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i. paid-up share capital of which does not exceed fifty lakh rupees or such higher amount

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as may be prescribed which shall not be more than five crore rupees; or

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turnover of which as per its last profit and loss account does not exceed two crore rupees

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ortr- such higher amount as may be prescribed which shall not be more than twenty crore

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Public Companytr-5P3L7N9Q
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By virtue of Section 2(71), a public company means a company which:

a. is not a private company;

b. has a minimum paid-up share capital of five lakh rupees or such higher paid-up capital,
as may be prescribed[omitted by Companies (Amendment) Act, 2015 ].
Provided that a company which is a subsidiary of a company, not being a private company,
shall be deemed to be a public company for the purposes of this Act.
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By the Companies (Amendment) Act, 2015 effective from 29th May 2015 the requirement
of minimum paid-up capital for a private limited company of '1 Lakh and for a public
limited company of '5 Lakhs been removed from the definition of the Companies under
section 2(68) and 2(71) of the Companies Act, 2013.

• Limited Company
As per section 3(2), a company formed under this Act may be either (a) a company limited by
shares; or (b) a company limited by guarantee or (c) an unlimited company.

a. Companies Limited by Shares

As per section 2(22), “company limited by shares” means a company having the liability of its
members limited by the memorandum to the amount, if any, unpaid on the shares held by them.

b. Companies Limited by Guarantee

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As per section 2(21) “company limited by guarantee” means a company having the liability of
its members limited by the memorandum to such amount as the members may respectively

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undertake to contribute to the company’s assets in the event of its being wound up.

c. Unlimited Company

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As per section 2(92), “unlimited company” means a company not having any limit on the

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liability of its members. Thus, the maximum liability of the member of such a company, in the
event of its being wound up, might stretch up to the full extent of its assets to meet the
obligations of the company

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by contributing to its assets.

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B. Government Companies
Section 2(45) defines a “Government Company” as any company in which not less than fifty
one per cent. Of the paid-up
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Government or Governments, 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.

Notwithstanding all the pervasive control of the Government, the Government company is
neither a Government department nor a Government establishment. [Hindustan Steel Works
Construction Co. Ltd. v. State of Kerala (1998) 2 CLJ 383].
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Foreign Companies
As per section 2(42), “foreign company” means any company or body corporate incorporated
outside India which—
a. has a place of business in India whether by itself or through an agent, physically or
through electronic mode; and

b. conducts any business activity in India in any other manner

Sections 379 to 393 of the Act deal with such companies. Section 380 of the Act lays down
that every foreign company which establishes a place of business in India must, within 30 days
of the establishment of such place of business, file with the Registrar of Companies for
registration.

D. Holding and Subsidiary Company On the basis of control, companies can be classified into
holding, subsidiary and associate companies. Holding company As per Section 2 (46), holding

companies are subsidiary companies

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company, in relation to one or more other companies, means a company of which such

• Subsidiary company

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Section 2 (87) provides that subsidiary company or subsidiary, in relation to any other company
(that is to say the holding company), means a company in which the holding company

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controls the composition of the Board of Directors; or

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exercises or controls more than one-half of the total share capital either at its own or
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together

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Prospectus

Introduction

The company’s prospectus is one of the key documents that serve as the face of the company
and helps in creating that first impression that induces the investors to invest in the securities
of the company and provides the financial impetus.

The Companies Act, 2013 has defined prospectus in Section 2(70). It includes any circular,
notice, advertisement, or other documents that invites a public offer for subscription or
purchase of securities of a company. Section 33(2) prescribes that a copy of the prospectus has
to be given to each person who requests the same, before the closure of the offer and
subscription list.

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A prospectus is issued only by a public company and not a private company for inviting
applications for shares and debentures, i.e. public offer. Private Companies have the option of

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the rights issue, bonus issue, or private placement under Section 42 of the Companies Act for
issuing securities [APL Industries Ltd v. Securities And Exchange Board of India (2017)
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Contents of Prospectus

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Section 26 of the Companies Act, 2013 chalks out the matter which is to be stated in the

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prospectus and other related nuances. The prospectus which is issued by or on behalf of the
company whether before its formation or subsequently after, has to be dated and signed by the
directors of the company.
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Red Herring prospectus

Section 32 of the Companies Act deals with the Red Herring prospectus. It is issued by the
companies planning to offer securities, before the actual issue of the prospectus. It is filed with
the registrar, at least three days before the opening of the subscription list and the offer. It is a
preliminary prospectus, that informs the investors about the potential offering of the company
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3L7Nindicates that a company has filed for an IPO. Red Herring prospectus does not mention
the exact price and quantity of the securities offered, whereas, the prospectus must mention the
quantum and the price of the total capital raised, the closing price of the securities, and other details, as
soon as the offer is closed which is not included in the red herring prospectus.
Shelf Prospectus

Section 31 of the Companies Act,2013 regulates the issue of shelf prospectus. It is basically a
prospectus that is issued for raising multiple rounds of funds in the form of bonds. SEBI
regulates the market issue of shelf prospectus which is filed with the registrar at the first offer
of securities.

Abridged prospectus

An abridged prospectus is a memorandum that contains salient features of a prospectus as per

the specifications prescribed by SEBI. The purpose of issuing such an abridged prospectus is
to reduce the public burden of a public issue of securities.

Deemed prospectus

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Section 25 of the Companies Act,2013 enumerates that any document through which the
allotted securities of the company are offered for sale, It is to be noted that the ‘issue’ of shares

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involves some measure of publicity and not a single act of private communication to any one
party.

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NCLT: Introduction

❖ The Company Law Boards (CLB) were replaced finally with the new, powerful
National Company Law Tribunal (NCLT) or "The Tribunal" by passing a government
notification under Section 408 of the Companies Act, 2013 on 1st June 2016 to that
effect.
❖ This was done years after the recommendation of the Justice Eradi Committee in 2002
to include it in the Companies Act, 1956 itself.
❖ Under Section 434 of the Act, the powers and pending cases of the CLB were
transferred to the NCLT. Further in this regard, powers and functions of the Board of
Industrial and Financial Reconstruction (BIFR) Appellate Authority for Industrial and

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Financial Reconstruction (AAIFR) and the High Court were also laid on the new
authority, making it the supreme authority in all company law matters.

Composition and Rules of Procedure

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❖ The NCLT presently has one Principal Bench at New Delhi and 10 subsidiary benches

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❖ The Tribunal is headed by a President, appointed by the Central Government in

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consultation with the Chief Justice of India. In addition, it has such other number of

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❖ The Tribunal is a quasi-judicial body which acts as a court of law in corporate disputes.
It objectively hears disputes, examines facts and pieces of evidence, and gives orders
to remedy the situation.
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❖ The Tribunal is not bound by the stringent rules of the Evidence Act and other
procedural codes.

Major powers of the Tribunal under the Act

Class Action Lawsuits

A Class Action lawsuit is a representative suit where few people represent the homogenous
tr-5Pinjury and demands of a larger group before the court. It is an effective remedy for a large
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group of people scattered geographically.

This power has been laid down in much detail under Section 245 of the Act where it states the
orders that may be sought, the people that may be held culpable, and the requirements to be
met.

People that Can Be Held Liable

The remedy be it compensation, or any other action may be sought not only from the Company
as a legal entity but also the following persons:

1. Directors of the Company Auditor(s) or the

2. Auditing Firm
3. Experts/Consultant/Advisors to the Company.

Deregistration

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The Tribunal has the power to order the deregistration of companies on any ground mentioned
in Section 7(7) of the Act. A company may be deregistered if, at the time of incorporation, the
incorporation was sought by:

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❖ Furnishing false information

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❖ Furnishing false representation
❖ Suppression

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of material fact in the filed documents and declarations
❖ Any other fraudulent action

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Oppression and Mismanagement
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Detailed remedy against oppression and mismanagement of affairs by the Company exists with
the NCLT under the Act of 2013. Section 241 provides that an application may be filed by
such members of a company who feel that:

1. The affairs of the company are being conducted in a manner that is prejudicial to their,
the companies, or any other member(s) interests or is oppressive to them or
2. A material change has occurred in the company's management be it a change in
Managing Director, ownership of shares, membership or otherwise. This change makes
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it likely that the affairs of the company will be conducted prejudicial to them, the
company or anybody else.
Powers of Investigation

Under Section 213, the NCLT has the power to investigate companies on an application filed
by its members or even an outsider if it is shown that there is sufficient evidence for doing so.
The application may be filed by

1. At least One hundred members holding at least one-tenth of the voting rights if the
company has a share capital
2. One-fifth of the total number of registered members
3. Any other person may also file an application

Annual General Meeting

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In case the annual general meeting is not organised in a particular required time under Section

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Winding Up of Company

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97 and 98, a member may file an application to the Tribunal to convene such meeting.

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If the Tribunal is satisfied on any grounds mentioned in Section 242, it may direct that a
company be wound up.

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Freeze Assets

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Section 221 allows the Tribunal to freeze the assets of a company if necessary.

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