This article is written by Pratibha Bansal, a student of Banasthali Vidhyapith, Rajasthan. She has discussed what is a company, procedure for its incorporation, characteristic of a company. Furthermore, the article also discusses the various kinds of companies under the Companies Act 2013.
Company is an association of person who takes their meals together. The term is derived from the Latin word (“com” meaning “with” or “together”; “panis” that is “bread”) Section 2(20) of Companies Act, 2013 states that a company means any association of person registered under the present or the previous companies act. It is called a “body corporate” because the persons composing it are made into one body by incorporating it according to the law and clothing it with legal personality.
Under common law, a company is defined as a ‘legal person’ or ‘legal entity’ separate from its member and capable of being surviving beyond the lives of its members. Whereas it is not merely legal, it is rather a legal device for attainment of any social or economic end and to a large extent publicly and socially responsible. It is, therefore, a combined political, social, economic and legal institution.
Features and advantages of the corporate form
a) Separate Legal Entity
The outstanding feature of a company is its independent corporate existence. A company before the law is a person. It is regarded as an entity separate from its members. By incorporation under the Act, the company is vested with a corporate personality which is distinct from the members who compose it. No one can say that he is the owner of the company. Now the business belongs to an institution. Thus a company continues to exist even if the members go on changing from time to time.
In the landmark decision of Salomon v Salomon (1897) AC 22, it was held that a company has a corporate personality which is distinct from its members or subscribers. A single shareholder may virtually hold the entire share capital of the company; even in such a case, the company does not lose its identity. It was declared that the business belonged to the company and not to a single shareholder or number of shareholders and neither of them is liable to indemnify the company for its debts.
In case of Tata Engineering & Locomotive Co. Ltd. v State of Bihar, the Supreme Court described the legal status of a company as “An incorporated association” before law is equal to a natural person and has a legal identification of its own. It has its own-
- Separate seal
- Separate assets from that of its members
- Can sue and be sued exclusively for its own purpose
Its creditors cannot obtain satisfaction from the assets of its member’s liability of the shareholders and members is limited to the amount invested by them in the company; similarly, creditors have no to the assets of the corporation. This position of a corporation is similar since the decision of the Salomon case.
The law recognises the existence of the company quite irrespective of its motives, intention, schemes, or conduct of the individual shareholders.
b) Perpetual succession
An incorporated company never dies, as it is an entity with perpetual succession. For understanding this point more clearly let’s assume M, N, and O are the only members of a company, holding all its shares. Their shares may be transferred to or inherited by P, Q, or R who may, therefore, become the new members and members of the company as they are now the shareholders of the company. But the company will remain the same entity, with same name, privileges and immunities, property and assets.
Hence in the case of Punjab National Bank v Lakshmi Industrial & Trading co ltd. it was held by the Allahabad High court that perpetual succession means that membership of a company may keep on changing from time to time, but that does not affect the companies continuity. A company has a perpetual existence i.e it has no soul to be saved or body to be kicked.
Since a company has no physical existence, it must act through its agents and all such contracts entered into by its agents should be under the company’s seal.
c) Common Seal
A Company becomes a legal entity by perpetual succession and also by a common seal. In fact, a common seal of a company is a symbol of its incorporation. It is considered as the official signature of a company. But now by the virtue of 2015 amendment to the Companies Act, a company may or may not have a common seal. As per section 21 of Companies Act, authentication of documents, proceedings and contracts on behalf of a company, signed by any key managerial personnel or an officer of the company duly authorised by the board in this behalf.
According to section 22, a company may, under its common seal can authorise any person generally or in respect of any specified matters, to act as an attorney to execute other deeds on behalf of the company, such deeds can be in or outside India. Such signed deeds by its attorney on behalf of the company binds the company. Provided that in case if a company does not have its common seal as per the amendment of 2015, the authorisation shall be made by two directors or by director and company secretary.
d) Limited Liability of Members
A company having its separate legal entity is the owner of its own assets and bound by its liabilities. Members are neither the owner nor liable for its debts. All the debts of a company are to be paid by itself rather than by its members. Members liability becomes limited or restricted to the nominal value of the shares taken by them in a company limited by shares or the amount guaranteed by them in a company limited by guarantee. Limited liability is a principal advantage of doing business under a corporate form of organisation.
Exceptions to the principle of limited liability
Incorporation by furnishing false information
According to section 7(7), (b) of the Act, tribunal may on an application made to it in regards to any fraudulent or false information being furnished by a company during its incorporation and on being satisfied with the same, direct that liability of the members of such company shall be unlimited.
Fraudulent conduct of business
Under section 339(1), during the course of winding up a company if it appears that any business of a company is carried on with the intent to defraud creditors of the company or any other persons, the tribunal may on the application of the Official Liquidator or the Company Liquidator or any other creditor on being satisfied declare that any person who is or has been a director, manager or officer of the company or any other person knowing part of aforesaid business shall be personally responsible, without any limitation of liability.
When the company is incorporated under section 3(2)(c) of the Act as an unlimited company. Then as the name clearly suggests that the liability of its members will be unlimited.
As per section 35(3) companies act, where it is proved that a prospectus is issued with an intention to defraud or mislead an applicant for securities of a company or any other person for any fraudulent purpose, then every person who was a director at the time of issuance of such prospectus or has been named as director in the prospectus shall be personally responsible without any limitation of liability for all and any of the losses or damages.
Acceptance of deposit with a fraudulent intention
As per section 75(1), when a company fails to repay the deposit or part thereof or any interest referred under section 74 within specified time and it is proved that deposit is accepted with the intent to defraud the depositors or for any fraudulent purpose, every officer of the company who was responsible acceptance of those deposits shall be liable of all or any of the losses or damages that may have been incurred by depositors.
e) Transferability of shares
Section 44 companies act of the Act, declares that “the shares or debentures or any other interest of any member in a company shall be a movable property that can be transferred in the manner provided in the article of the company.” Thus incorporation of a company allows its member to sell their shares in an open market and to get back his investment without any hassle of withdrawing money from the company. This unique feature of incorporation provides liquidity to the investor and stability to the company because on the other hand in a partnership firm partners can’t sell their share in an open market except with unanimous consent of all the partners.
f) Capacity to sue and be sued
Being a body corporate company possesses individual capacity being sued and suing others in its own name. A company’s right to sue arises when some loss is caused to the company i.e. to property or personality of the company. A company also has a right to sue whenever any defamatory material published about it that may affect its business.
The criminal complaint can be filed by a company but it must be represented by a natural person. Not necessarily be represented throughout by the same person but the absence of such representative may result in dismissal of the complaint. Similarly, any default on the part of the company can be sued by the victim on the name of the company only.
g) Company, not a citizen
According to Citizenship Act 1955, only a natural person can be a citizen of India, not a juristic person will be considered as citizen same stated by the Supreme Court in case of The State Trading Corporation Of India Ltd. vs The Commercial Tax Officer. Even though the company does not get the citizenship status of a country, it still can get a residential status.
Procedure for Registration and incorporation of a company
Starting from section 3 of the Companies Act, which states provision regarding the formation of a company. A public company may be formed by seven or more person, whereas, a private company can be formulated by two or more people and one person company can be incorporated by one person only. By subscribing their names to a memorandum company and complying with the procedure for registration prescribed under the Act company can be formulated according to the provisions of law.
There is an exception for the incorporation of one person company is that its memorandum must indicate the name of another person with his prior consent, consent should be in writing which is to be filed with the registrar along with its memorandum at the time of incorporation that should be done according to the procedure of law.
The person named then shall become a member of the company in case of subscriber’s death or his incapacity to contract. The named person can withdraw his consent or the at any time can change the name of the other person according by giving notice in such a manner prescribed by law.
It becomes the duty of the member to indicate the change made to the company via indicating it in the memorandum or in any other prescribed manner and the company shall imply the same to the registrar. Such change of name will not be considered as amendments in the memorandum as this change is not affecting any terms and conditions of the company.
Registration procedure under Companies Act 2013
As per section 7 of companies Act,2013, the incorporation of the company shall be filed with the Registrar within whose jurisdiction the registered office of the company is to be situated. Required documents are as follows.
- Memorandum of association(herein referred to as MOA) and Article of Association (herein referred to as AOA) which is to be signed by all the subscribers to the memorandum in the prescribed form.
- A declaration is to be made in the prescribed manner by an advocate, a chartered accountant, cost accountant or company secretary who is a part of formation of the company and also by a person named in the article as director, manager or secretary of the company that all the requirements of the act and rules for registration of an association are fulfilled.
- An affidavit of each of the subscribers to the memorandum and person named as first directors in the article declaring that they have not indulged in any criminal activity during promotion, formation or management of the company neither be found guilty of any fraud or misrepresentation or any breach of duty of any company under present company law or any previous 5 year company law.
- The affidavit must also state that all the documents given to the Registrar for registration of the company are true to his knowledge that contains all the correct information. If any of such information found wrong, the person shall be liable for action under section 447 of the Act.
- Correspondence address of company till its registration must be established.
- All the particulars(name, address, surname, nationality, etc.) of each subscriber to the MOA and person mention as first directors in the AOA of the company along with identity proof and for directors Director Identification Number must be prescribed in case any subscriber is a company then such details should be prescribed.
- Particulars relating to the interest of the first directors of the company in other firms or body corporate along with their consent to as a director must also be provided.
After collecting all the information and documents, the registrar shall register all the documents and information given to him and issue a certificate in a prescribed form to ratify the company proposed is incorporated under this act.
Company will also be provided with a distinct identity in the form of Corporate Identification Number that must also be included in the certificate issued by the Registrar after incorporation is completed.
Company shall keep all the copies of the documents and information provided during registration at its registered of till its dissolution.
Section -8 of the companies act, 2013 deals with the formation of charitable companies whose objectives are charitable in nature. Such companies must be registered under this act as a limited company.
What are its effects(with respect to section 9)?
All the subscribers to MOA will become members of the company and are capable of performing all the functions of an incorporated company under this act from the date of its incorporation specified in the certificate issued as a proof of such incorporation.
Every alteration that is to be made either in MOA or AOA shall be done through special resolution and after complying with the procedure specified under the act. Such alteration will have no effect without the approval of the Central Government in writing. Such approval is not required for AOA alterations or any alteration in regards to the name of the company is deleted therefrom or addition thereto, of the word.
Difference between the company and partnership firm
Making a distinction between a company and a partnership firm as both are formed by no of members agreeing to for either of them.
- Companies are incorporated under the companies act whereas partnership firms are created on a mutual agreement between the partners.
- Companies are governed Indian Companies Act, 2013 whereas for managing and controlling partnership firms there is Indian Partnership Act, 1932.
- Registration of partnership firms is voluntary unlike of a company which is obligatory under the Companies Act to be recognized as a separate legal entity before the law.
- Number of partners required for incorporation of partnership firm is 2 max can be 100 and for incorporation of company minimum number of members that are required is 2 in case of private company and maximum can be 200, but in public company it has to be a minimum of 7 persons that can last to unlimited as no fixed number is specified, also one person company can be incorporated by one member.
- Company is a separate legal entity whereas the partnership firm isn’t.
- A company has a contractual capacity of suing and being sued in its own name whereas a partnership firm can’t.
Classification of companies
Following are the grounds for making the classification of companies.
On the basis of incorporation
There are two types of companies which are as follows.
Companies incorporation under a special act of parliament or state legislature not under any of the companies act and provisions of the same do not apply to such companies. Example are- RBI, SBI, Employees State Insurance Corporation etc.
Companies which are incorporated under section 7 of the companies act 2013 or any other previous companies law. For example- Tata, Reliance, Infosys etc.
On the basis of the number of members
There are three forms of companies classified on the basis of the number of members required for its incorporation.
One person company
Section 2(62) of companies act 2013 defines one person company as a company that is to be incorporated with one person as a member. Whereas section-3 companies act specifies certain exceptions that are to be followed for making registration of a one person company. For example- AVV AD Avenue (OPC) Pvt. Ltd. company, etc.
According to section 2(68), a private company except in the case of one person company limits the number of its members to two hundred, minimum paid-up capital is as may be prescribed. Such companies prevent any public invitation to subscribe to any of its securities.
Public companies defined under section 2(71), as not a private company, whose shares are exchanged in an open trade market. It issues its shares via an initial public offering and the same can be bought by the general public. A minimum number of members required to form a public company is at least seven and may extend to unlimited. There is no restriction on the transferability of its shares.
On the basis of control
There are three categories of companies identified on the basis of control is as follows.
Section 2(46) of the Act states that when one company is having control over the composition of the board and the company holds the majority of shares in the other company is known as holding the company of that other company.
A company whose control and composition is regulated by the other company known to be its holding company are called subsidiary companies. Its composition of the board of directors are being controlled by its holding company and more than half of its shares are in possession of that company. Section 2(87) of the act define a subsidiary company.
Company in which the other company has significant influence but the company is not a subsidiary of the company having such influence(control of at least 20% of total share capital) is called an associate company according to Section 2(6). These type of companies include joint venture company
On the basis of Liability
Liability of its members is either limited to the share bought by them or limited to the amount each member consented to contribute to the assets of the company at it’s winding up.
Limited by share
Liability of members is limited to the number of shares bought by them in a company limited by share. A company having the liability of its members limited by the memorandum to the amount, if any, due on shares held by them respectively is called company limited by shares according to section 2(22)
Limited by guarantee
Limited by guarantee is one whose members liability is limited by the memorandum. This liability will be limited to such amount as members respectively undertake to contribute to the assets of the company in the process of it’s winding up. Liability of the members is limited to the fixed sum specified in the memorandum agreed by the members to contribute.
2. Unlimited companies
Limited liability is a desirable option by the members but is not a necessary adjunct to incorporation. According to section 2(92) of the Act, any company not havings limit on the liability of its members is termed as an unlimited company. These types of companies are rarely formed now. AOA is must for such companies stating the number of members with which the company is registered and amount of capital share if it has. Liability of the member is like partners of a firm for all trade debt without any limit.
On the basis of the manner of access to capital
According to section 2(56), any company whose securities are listed on any recognised stock exchange for public trading is termed as a listed company.it is also known as a quoted company.
These companies are privately owned companies as they are not listed on any stock exchange. Hence they do not find any opportunity to raise funds.
Doctrine of lifting the corporate veil
It has often been assumed that it is a veil covered on a personality of a company beyond which a court can’t see, which is not actually true. It can be said that this doctrine is an exception to the natural person identity of a company.
In Charanjit Lal v Union of India case, the Supreme Court did not allow a shareholder to sue for the violation of the fundamental rights of a company.
A company before the eyes of law is a legal person but in reality, it is an association of person incorporated under the Act to be called a company. There are certain exceptions when the curtain of corporate personality can be lifted by the court. In the question of property and capacity of acts done and rights acquired or, liability assumed thereby the personality of the company corporators are being ignored. Whereas, when the members enjoying the benefits on the name of a company or when the court wishes so can lift such a veil. Specific grounds on which a court can lift the corporate veil are as follows.
- In case of determining the character of a company- To see whether a company is an “enemy”. In such cases, the court may in its discretion examine the nature of persons in real control of the corporate affairs.
- For the benefits of revenue-The court can cancel the registration of a company if it is used for tax evasion purposes” this statement is held by the Supreme Court in Juggilal Kamlapat v CIT case under income tax act, agricultural income is exempted from tax.
- In Bacha F Guzdar v CIT [AIR 1955 SC 74] Court observed that the income of a tea company was exempted upto 60% as agricultural income and 40% is taxed income. Plaintiff is an employee of such company and demand exemption of 60% in dividend income as to be regarded as agricultural income. Therefore, it was held by the court that though the income of the company is partly agricultural, therefore income, when received by the shareholders as dividends, could not be regarded as agricultural income.
- In case of fraud or improper conduct-The court can refuse to uphold the separate existence of a company where it is formulated to overcome law, to defraud creditors or to avoid legal obligations. Simply stating that whenever a company is incorporated with an intention to defraud its creditors or to avoid legal duties, in such cases the court has the power to lift the veil of the corporation.
- There can be many other possible grounds on which court can lift the veil of a corporation to get to know the true picture of working of any company.
Any association of person to be called a company is to be registered under the procedure prescribed by the Law. An incorporated organisation is queued with a bundle of advantages, which a partnership firm or any other business organisation does not have. Therefore indulging in business with an incorporated organisation is the safest way.
There are many other miscellaneous Category of companies, those are not being discussed in the given article.