Company Law

Company law

Definition-Company

By lord Justice Lindley1. An association of persons2. Who contribute money or money’s worth3. To a common stock4. And employ it in some trade or business5. And who share the profit or loss6. Arising there from

Company’s Act 1956

Section 3(1)(i)A company formed and registered under

this Act or an existing company

A voluntary incorporated association which is and artificial person, created by law with limited liability, having a common seal and perpetual succession

Salient features of a registered company

1. Voluntary association2. Artificial person3. Legal entity4. Legal restrictions5. Perpetual succession

1. K/9 Meat suppliers (Guildford) Ltd Re(1966)3 All ER 3206. Common seal7. Share capital8. Limited liability9. Transferability of shares10. Ownership and Management

Classification of company

1. Mode of formation2. Control3. Ownership4. Share capital5. Domicile.

Classification of company

Chartered Statutory Registered

Limited Unlimited

Shares Guarantee

Public Private

Chartered companyIncorporated by royal charter- eg:- East India

Company- no place in India after independenceStatutory Company

Incorporated under special Act passed by Parliament or State legislature- public enterprises or public utility services-formed to carry out special undertaking. Eg:- Reserve Bank, SBI, Industrial Financial corporation, Unit Trust of India.

Registered CompanyLimited liability

Limited by shares• Public and Private

Limited by guarantee• Contribute to assets in the event of winding up- extend as given

in MOA- promotion of Arts, science, culture, charity, sports, commerce etc.

Unlimited liabilityLiability depends on debt incurred by the company-

full liability for debtsAdvantage- may or may not have shares or

purchase its own shares- no restriction on increase or reduction of shares.

Private Company

Defined by section 3 (1)(iii) Which has a minimum paid up capital of

Rs.1,00,000 or such higher paid up capital as may be prescribed, and by its articles restrictsa) restricts the rt to transfer its sharesb) Limits the member to 50c) Prohibits any invitation to the public to subscribe for

any shares or debentures of the companyd) Prohibits any invitation or acceptance of deposits

from persons other than its members, directors or relatives.

Public company

Section 3(1)(iv)A company which is not a private

companyMinimum paid up capital of Rs. 5 lakh or

such higher amountIs a private company which is a subsidiary

of a company which is not a private company.

Difference Private Min-2 max. 50 No public shares or

debentures Need not wait for minimum

subscription for allotment of shares

Business soon after incorporation

No statutory meeting Quorum for meeting-2 persons Restriction for transfer of

shares 2 directors, no retirement MOA signed by 2, wind up if

falls short

Public Min -7 max no limit General public subscription Allotment after min no. of

applications and min subscription

Wait for certificate of commencement of business

Statutory meetings 5 persons must be present Shares freely transfereable Issue of prospectus MOA signed at least by 7 3 directors,1/3 retire by rotation Loan to director- previous

approval

Privileges of a private company

Min 2 members/ directorsNo

minimum subscription, prospectus/statement in lieu of prospectus, member index, statutory meeting/report, max managerial or director remuneration, retirement by rotation, consent and qualification shares in director appointment, restriction on interested director participation, govt approval for remuneration increase, restiction on advancing loans to other companies, qualification shares need not be filed with the Registrar of companies.

Conversion of pvt to public

Conversion By default (s.43)

In membership, transferability of shares, public invitation for shares

CLB satisfied failure due to accident, inadvertence or some other sufficient ground

Operation of law (s.43 A)To check misuse of pvt co. status

Choice

Classification basis- control

Holding companySec.4 (4)- a company shall be deemed to be

holding of another if that other is its subsidiarySubsidiary company relative terms

Which holds more than 50% of the issued share capital or more than 50% of the voting power,

Power to appoint majority of directors of other companyCo in relative terms one controls the other, controlled

company- subsidiary & controlling co is the holding company

Subsidiary co. sec.4(1)

A company is known as a subsidiary of the other company when control is exercised by the latter over the former called a subsidiary company.

In 3 casesCompany controlling composition of BODHolding of majority of shares

More than half in nominal value of equity share capitalFace value of equity capital which has been

subscribedSubsidiary of another subsidiary

Classification basis- ownership

Non- GovernmentGovernment

Not less than 51% of the paid- up share capital is held byCGSG/sPartly by CG & partly by one or more SGs

• Eg:- State Trading Corporation of India Ltd, Minerals and Metal Trading Corporation of India are govt companies.

• Subsidiary of a Govt. Co is also a Govt Co. S.617- BHEL But employees do not become Govt servants.

Rules applicable to Govt. Companies

Appointment of auditor and audit reports (S.619)

Annual report placed before Parliament (S.619-A)

Provisions of 619 to apply to certain companies. (S.619-B)

Certain provisions of the Companies Act do not apply

S. 619 -B Apply to company- <51% held by one or more of

the following/ combination thereof as GC.a. CG & one or more GCb. SG/S & one or more GCc. GC, one or more SG & one or more GCd. CG & 1 or more corporations owned and controlled

by CGe. CG,SG/s, one or more corporations owned and

controlled by CGf. 1 or more corporations owned or controlled by CG

& SGg. More than 1 govt. co.

Foreign Company

S. 591 (1)Incorporated outside- has established place of business in India

S.591(2) Where a min.of 50% of the paid –up share capital(equity/preference) of foreign co. is held by one or more citizens/bodies corporate incorporated in India whether singly/jointly comply provisions as if it were an Indian Company

Conti…….

Accordingly co. incorporated outside & employs agents in India but has no office or does not establish a place of business in India is not a foreign company

A co. has a specified or identifiable place at which it carries on such business as office, store house, godown or other premises having some concrete connection b/w locality and its business.

Associations not for profit

S.13 Name of a limited co end in LtdS.25 permits registration- license by CGOf an association not for profit with Ltd

liability without using the word ‘Ltd’.Conditions for license

For promoting art, science,literature, commerce, religion or any other useful object.

Intention- apply profits for promoting its objectsProhibits payment of dividends to its members.

Revocation of license

Any timeAdd Pvt LtdPrior notice in writingCompany with license u/s 25 alter MOA-

prior approval of CG- if not license revoked

License revoked body contains in its name Chamber of commerce- change within 3 months-fine Rs.5000/- every day

One Man CompanyPvt co.Practically holds the whole share capitalTo meet statutory requirement – min

member/dummy-relatives or friends-nomineesHold just 1 or 2 shareA pvt co. registered with share capital of

Rs.5,00,000/- has divided its shares into 5000/- shares of Rs.100/-each. Of these 4,999 held by A & one share by A’s wife

Like any other co. - is a legal entity distinct from its members.

Prohibition of large partnerships S.11A co, assn, or partnership consisting of more than

10 persons for the purpose of carrying on banking business and of more than 20 persons for the purpose of carrying on any other business with the objective of earning profits can be legally formed only when it is registered under the Companies Act, 1956, or is formed in pursuance of some other Indian law or is a Joint Hindu Family carrying on business as such.

If the no of members in an association or partnership exceeds this statutory limit and it is not registered under the Companies Act, it is an illegal association and has no legal existence.

Consequences

Personal liabilityContracts

Cannot sue Debts dueCannot bring action individually or collectively

to enforce any contract.Winding up

Penalty

Improper use of Limited and Private LtdRs. 500 every day.

Lifting or piercing the corporate veil

Legal person distinct from its membersPrinciple referred to as ‘the veil of

incorporation’Courts bound by this principleEffect- a fictional veil(not wall)b/w

company and its membersCo. has a corporate personality

Started using blatantly as a cloak for fraud, improper conduct

Became necessary to break throughLook at persons who are behind the co.

who are the real beneficiaries.

Circumstances of lifting corporate veil

Common Law or Judicial interpretationsStatutory provisions

Common Law Exceptions

1. Protection of revenue2. Prevention of fraud or improper conduct3. Determination of character – enemy4. Where co. is a sham5. Co. avoiding legal obligations6. Acting as agent or trustee of the shareholders7. Avoidance of welfare legislation8. Protecting public policy9. Formation of subsidiaries to act as its agent

Protection of revenue

Tax evasionSir Dinshaw Maneckjee Petit, Re

Prevention of fraud or improper conduct

Interest of justiceIncorporation used for fraudulent purpose

like defrauding creditors or defeating or circumventing law

Jones v. Lipman

Determination of character – enemy

Assume enemy character – persons in de-facto control of its affairs- residents of enemy country

Examine character of Co and declare it to be enemy co.

Daimler Co. Ltd v. Continental Tyre and Rubber Co. Ltd

Where co. is a sham

Mere cloak or a sham(hoax)Gilford Motor Co. Ltd v. Horne

Avoidance of welfare legislation

Workman of Associated Rubber Industry v. Associated Rubber Industry Ltd

Merely to reduce the amount of bonus.

Formation of subsidiaries to act as its agent

Merchandise Transport Ltd v.British Transport Commission

Obtaining license

Statutory Provisions

Reduction in Membership-(2,7)Misrepresentation in ProspectusFailure to return application moneyFailure to deliver share certificates (3,2

months)Mis description of nameHolding- of subsidiary co. etc.

Body Corporate

An incorporated Co. is a body corporate but many bodies corporate are not incorporated companies.

Body corporate is a wider term.Eg:- ONGCBut not a society registered under the

Societies Registration Act.