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The Companies Act, 1956 Why study company law ?  Most popular form of business organisation. Why……….?

 It provides an organisational framework it is a means to an end

 A company is a person in Income-tax.  More than 60% of income-tax revenue comes from corporate assessees

M E A N IN G O F A C O M P A N Y A C O M P A N Y IS A N A S S O C IA T IO N O F P E R S O N S F O R S O M E C O M M O N P U R P O S E V IZ . B U S IN E S S , C H A R IT Y , R E S E A R C H E T C . R E G IS T E R E D O R IN C O R P O R A T E D U N D E R T H E C O M P A N IE S A C T W H E R E B Y IT A Q U IR E S C E R T A IN A T T R IB U T E S S e p a ra te L e g a l E n tity

T ra n s fe ra b le S h a re s

L im ite d L ia b ility

S e p a ra te P ro p e rty

P e rp e tu a l S u c c e s s io n

C o m m o n S e al

Company, according to Lord Justice Lindley • By 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 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. • The shares are always transferable although the right to transfer is often more or less restricted. (Lord Justice Lindley)

• On the basis of its characteristics, a company can be defined as “an incorporated association, which is an artificial person created by law, having a separate entity, with a perpetual succession and a common seal”. (Haney)

Characteristic Features of a Company Separate Legal entity Salomon v Salomon &Co.Ltd.

Limited liability of members Perpetual Succession

 Separation of ownership from management  Transferable shares  Separate Property  Common Seal Capacity to sue and being sued Limitation of action: A company cannot go beyond the power stated in the memorandum

Disadvantages of a Corporate Form 1. Formalities and Expenses: complex, cumbersome, and detailed legal formalities.

2. 3. 4. 5. 6.

Corporate disclosures Separation of control from ownership Greater social responsibilities Greater tax burden in certain cases Detailed winding up procedure.

Lifting the Corporate Veil Fictional veil between the company & its members Lifting the veil means disregarding the corporate entity and paying regard to the realities behind the legal form

Under Statutory Provisions 1. Reduction of membership below the statutory minimum (sec. 45) 2. Misrepresentations in prospectus (sec.62 & 63)

3. Failure to return application money (sec. 69) 4. Misdescription of name (sec. 147) 5. Piercing the veil in holding and subsidiary company relationships 6. Company under investigation 7. Fraud during winding up 8. For ultra vires Act 9. For violations of the provisions of other statues

Under judicial decisions 1. Lifting corporate veil in tax matters. 2. Lifting corporate veil where company is used for evasion of personal and statutory obligation. 3. Lifting corporate veil for determination of the enemy character of the company.

1. Lifting corporate veil where company is used to avoid welfare legislation. 2. Lifting corporate veil where body corporate is used to commit fraud or improper conduct. 3. Lifting corporate veil for determining technical competence of the company.

Difference between Company & Body Corporate 

Body Corporate is wider than the term company

 It has three distinct attributes:

 Separate legal personality  Perpetual succession  Common seal

According to section 2(7) body corporate or corporation includes: - A company formed under the Companies Act, or a statutory company. - A company incorporated outside India (foreign company) - Public Financial Institutions - Nationalised Bank, - Any other association of person declared as a body corporate by the Central Government. Ex. ONGC

Thus every company is a body corporate but every body corporate is not a company. The term body corporate however does not include u/s 2(7) of the Companies Act: 1) A corporation sole: A corporation sole is a single individual constituted as a corporation in respect of some office held by him or function performed by him. It enjoys corporate personality and status. For example the offices of President of India, Governor of State, constitute a corporation sole. The Crown or a Bishop under the English Law are examples. 2) A co-operative society:

Is Company a Citizen • A company has nationality and domicile and residence • But it is not a citizen and therefore cannot be said to have the fundamental rights expressly conferred upon citizens only. • As per the Citizenship Act, 1955, only the natural persons can be citizens of India. So a company cannot be a citizen of India.

Is Company a property of the Shareholder? • No, the company is not the property of its shareholders. All the property in the name of the company is its separate property which is controlled, managed and disposed of by the company in its own name. • Thus the company is the owner of its assets and capital. • Moreover, the company being a separate legal person, it cannot be construed as property of the shareholder. • The decision of the Supreme Court in the case, National Textile Worker’s Union vs. P. R. Ramkrishnan, AIR 1993 (SC), has set at rest at the debate which was going on this issue.

Kinds of Companies A. The Companies not covered by the Companies Act, 1956. B. The Companies covered by the Companies Act, 1956.

Companies not covered by the Companies Act i) Statutory companies ii) Chartered Companies

Companies covered by the Companies Act a) Private Company - Sec 3 (1) (iii) b) Public Company - Sec 3(1)(iv) These companies may be: v) Companies with liability limited by shares. vi) Companies with liability limited by guarantee. iii) Companies with unlimited liabilities (Unlimited Companies).

COMPANIES COVERED BY THE COMPANIES ACT PUBLIC

PRIVATE

NOT COVERED BY THE COMPANIES ACT STATUTORY

CHARTERED

THESE COMPANIES MAY BE

1. Companies Limited by Shares 2. Companies Limited by Guarantee 3. Unlimited Companies OTHER COMPANIES

1. Companies not for profit 2. Government Companies, 3. Foreign Companies 4. Holding and Subsidiary Companies

From the point of view of liability, public and private companies may be organized as I. Companies not for profit ii. Government. companies iii. Foreign companies iv. Holding and subsidiary companies

Private Company A private company means a company which has a minimum paid up capital of one lakh rupees or such higher paid up capital as may be prescribed and which by its articles: – Restricts the rights to transfer its shares – Limits the number of members to fifty – Prohibits any invitation to the public to subscribe for any share, debenture of the company – Prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.

FEATURES OF PRIVATE COMPANIES A PRIVATE COMPANY Means a Company which has a minimum paid-up Capital of Rs. 1.00 lac AND

1. Number of Members

Minimum 2 Maximum 50

2. Transfer of Shares

Restricted

3. Invitation for Public

4. Invitation or Acceptance of

Subscription

Deposits

No public Offer

N o t a llo w e d f r o m persons other than it s m e m b e r s , d ir e c t o r s o r t h e ir r e la t iv e s

for Shares or Debentures

FEATURES OF PUBLIC COMPANIES A PUBLIC COMPANY means a company which Is formed by at least Seven Persons and which is not a a private company

which has a paid-up capital of

which is a pvt company & subsidiary of

Rs. 5 lac

a public company

Distinction of a Private Company and a Public Limited Company         

Number of Members Number of Directors Transfer of Shares Public Subscription Commencement of business Allotment of Shares Statutory Meeting Managerial Remuneration Index of members

Other Companies a. Government company [Sec 617] b. Foreign Companies [Sec 591] c. Holding and subsidiary Companies [Sec. 4] d. Companies not for profit (or Association not for profit) [Sec 25] e. Public financial institutions f. Investment company

Government Company [Sec. 617] A Government company is a company in which not less than 51% of the share capital is held. 1) by the Central Government , or 2) by one or more State Government, or 3) partly by Central Government and partly by State Government. Notes: 1) A Government company may be either a public or private company. But a government company needs not use the word 'private' as a part of its name. 2) The auditor of the government Company shall be appointed by the Central Government on the advice of the Comptroller and Auditor General of India [Sec. 619(2)].

Holding Company and Subsidiary Company [Sec. 4] A holding company is one which exercises control over another company, and a subsidiary company is one, over which control is exercised. Control can be exercised either through composition of Board of directors or through shareholding in the subsidiary.

Holding Company is one: 1) Which holds more than half of the nominal value of the equity share capital of another company (subsidiary company) 2) Which controls the composition of the board of directors of another company (subsidiary company). Control involves the power to appoint all or majority of the board of directors without the consent of some other person. 3) A company shall be deemed to be a subsidiary company of another if it is a subsidiary of a third company which itself is a subsidiary of the controlling company. For example, where company S is a subsidiary of company H and company X is a subsidiary of company S then company X shall be a subsidiary of company H .

Illegal Association [Sec 11] An association or partnership is an illegal association if all the following conditions are satisfied : (a)    The number of persons carrying on business exceeds 20 (10 persons in case of banking business). (b)    It is formed for the purpose of earning profits. (c)    It is not registered under the Companies Act or formed under any other Indian law (e.g. Cooperative Societies Act ,Trust Act). (d)    It is not a Joint Hindu Family (i.e., an HUF is not an illegal association even if he number of members exceed 20 or 10, as the case may be).

Exceptions to Illegal Association 1. 2.

Associations ‘not for profit-making’ Joint Hindu Family

Effects of an Illegal Association 1) In the eyes of law it has no legal existence. 2) Every member is personally liable for all liabilities incurred in the business. 3) Members are punishable with fine, which may extend upto Rs. 10,000. 4) Such an association cannot sue any of its members or any outsider, not even if the association is subsequently registered as a company. 5) The illegality of an illegal association cannot be cured by subsequent reduction in the number of its members (Kumar Swami Chettiar v. M.S.M. Chinnathambi Chetteiar).

6) The profits made by an illegal association are, however, liable to assessment to income tax (Gopalji Co. v.

Conversion of private company into a public company 1. Conversion by default [Sec. 43] Where a private company makes default in complying with any of the four restrictive conditions it will be deemed as if it is not a private company.

2. Conversion by operation of law 3. Conversion by choice [Sec. 44]

Conversion of a Public company into a Private company 1) Special resolution for insertion of restrictions of private company 2) Changing the name 3) Obtaining the approval of the Central Government as required by Sec. 31 4) Filing of Altered Articles of Association with ROC 5) Obtain fresh certificate of incorporation

Defunct Company 1) A company which has stopped carrying on any business or which is not in operation is termed as a defaunt company. 2) The Registrar of companies may strike off company’s name from the registrar of companies. 3) When the name of company is struck off the registrar of companies, the company stands dissolved. 4) Thus, a defunct company can be dissolved without resorting to the winding up procedure.

Administration of Companies Act - I CENTRAL GOVERNMENT (Ministry of Corporate Affairs)

REGIONAL DIRECTOR REGISTRAR OF COMPANIES

Jurisdiction of Courts

S u p re m e C o u rt N a tio n a l C o m p a n y L a w A p p e lla t e T r i b u n a l

N a tio n a l C o m p a n y L a w T rib u n a l