corporate

Block - I

Company and its Incorporation

CONTENTS

Unit-1 : History of Company Legislation

Unit-2 : Corporate Personality

Unit-3 : Kinds of Companies

Unit-4 : Formation and Incorporation of a Company

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UNIT-I HISTORY OF COMPANY LEGISLATION

STRUCTURE

1.0. Introduction

1.1. Objectives

1.2. History of Company Legislation in England

1.3. History of Company Legislation in India.

1.4. Summary

1.5. Test your knowledge

1.0. Introduction

To understand the development of the Companies Legislation in India it is very

important to first have a look at the development in the area in England as Indian

legislations on the subject very closely follow the development in English law.

Such a strategy is not only important but also desirable taking into account the fact

that India was an English colony and has got the superstructure of many laws in

legacy.

1.1. Objectives

The main objective of this unit is to understand the development of the

Companies Legislation with the march of the progress in business and economy.

After going through this unit you will be able to:

Have a glimpse of development of Company law in England

Get an understanding of the development of Companies legislation in India.

Understand the various amendments brought about in the Companies Act,

1956 and the reasons which prompted them.

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1.2. History of Company Legislation in England

The origins and development of Company law in India is based on the

English Company Law. Whatever Company legislations have been passed in

England from time to time has been followed by the Indian law with certain

modification. The Companies Act, 1956 is said to follow the U.K. Companies Act,

1948. In England, the ‘merchant guilds’ were the earliest business associations

which came up during the 11th to 13th centuries. Charters were granted to the

members of the guilds by the Crown which gives them a monopoly in respect of

particular trade. These associations were either formed as ‘Commenda’ or

‘Societas’. ‘Commenda’ carries on its operation in the form of partnership where

the financier is a sleeping partner and has limited liability, the liability to be borne

by the working partners. On the other hand in the ‘societas’, all the members took

active part in the management of the trade and had unlimited liability.

During the 14th century certain merchants adopted the word ‘Company’ for

their overseas ventures. This ‘Company was an extension of the merchant guilds in

foreign trade. By the close of the 16th century Royal charter were issued which

granted monopoly of trade to members of the Company over a certain territory. The

Companies were known as regulated Companies, one example of which is East

India Company established by charter in 1600. East India Company heals a

monopoly of trade in India. Its members had the option to subscribe to the joint

stock of the Company or to carry on trade individually. In 1653 permanent

subscribed funds was introduced known as joint stock or fund of the Company,

hence the name joint stock Company. The members contributed to the joint stock of

the Company and were shareholders of the profit that was earned by the use of their

capital, to be shared after that after each voyager.

By the close of the 17th century all these Companies or merchant guilds had

established permanent fixed capitals represented by shares which were freely

transferable. The property of the Company was to be controlled by the governors or

directors for the purpose of carrying on the business and was not to be divided

between members at intervals of time.

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Till then the only method of incorporation a Company was by Royal Charter

or by Act of parliament. The methods were quite expensive and time consuming.

Thus many Companies came into existence by agreement and without

incorporation. Consequently, there was spurt of many Companies having

speculative or even fraudulent schemes. The scheme of the South Sea Company is

the best example of the notorious Company floatation at that time.

To check the emergence of the Companies of the Companies with

speculative or fraudulent motives the Bubble Act, 1720 was passed. The Act

prohibited the floating of a corporation unless authorized by an Act of Parliament

or Royal charter. As a result of the passing of the Bubble Act Companies

disappeared like the bursting of the bubble.

Through the Bubble Act prohibited the incorporation of a Company without

on Act of parliament or Royal charter, it did not legislate against the unincorporated

Company.

The Bubble Act was repealed in the year 1825 and in 1834, the Trading

Companies Act, 1834 was passed. This Act empowered the Crown to grant by

Letters Patent any of the privileges of incorporation except limited liability. The

Chartered Companies Act, 1837 provided for the first time that personal liability of

members might be limited to a specific amount per share through letters Patent.

The Joint Stock Companies Act was enacted in 1844 providing for the

registration of Companies with more than 25 members or with shares which are

freely transferable without any consent by the members. By this Act the office of

the ‘Registrar of Companies’ was created for the first time. The particulars

regarding the constitution of a Company, charges their in and annual returns are

required to be filed with the Registrar so that there shall be an official record of the

Company. Despite the incorporation of the Company, members are still personally

liable, but their liability was to cease three years after they had transferred their

shares by registered transfer and creditors has to first proceed against the Company.

Members could escape personal liability by an agreement to the contrary, providing

that the member’s liability shall be limited to unpaid part of the shares.

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In 1885, parliament enacted Limited Liability Act, 1855 which provides that

the Joint Stock Companies registered under the Act of 1844 might limit the liability

of its members to the amount unpaid on their shares.

In 1856, the English Companies Act was enacted (the Joint Stock

Companies Act, 1856), which repeated both the Acts of 1844 and 1855. Under the

Act of 1856, seven or more persons could form themselves into an incorporated

Company with or without limited liability by signing memorandum of association.

The Act of 1856 was repealed by the Act of 1962 The Act was further repealed by

the Acts of 1908, 1928, 1948, 1967, 1976, 1980, 1981 and 1983. In 1985, the whole

of the existing law relating to Companies was consolidated in the Companies Act,

1985 which is the present statute governing Companies in England.

1.3. History of Company Legislation in India

As discussed earlier, the Company legislation in India has closely followed

the English Companies Legislation. The Indian Company Law originates in the

year 1850 when the first Indian Companies Act was enacted on the lines similar to

the English Companies Act of 1844. The Act of 1850 provides for the first time in

India registration of joint stock Companies. In 1857, another Act, closely following

the English Companies Act y 1855, was passed, which extended the privilege of

limited liability to joint stock Companies excepting Banking and Insurance

Companies. The Indian Companies Act, 1860 was enacted on the lines of the

English Companies Act and extends the privilege of ‘limited liability’ to Banking

and Insurance Companies as well. The first comprehensive legislation was enacted

in the in the year 1866 on the model of the English Companies Act of 1862 and

provided for the incorporation, regulation and winding up of Companies. The Act

was amended several times in 1882, 1887, 1891, 1895 and 1910, till we had a

consolidating Act – ‘The Indian Companies Act, 1913’ – which brought Indian law

at par with English Companies Act of 1908. It was by this Act that the institution of

‘Private Company’ was for the first time introduced in the Indian Company Law.

The Act of 1913 was further amended in the year 1914, 1915, 1920, 1926, 1930

and 1932. The Act was extensively amended in 1936 on the lines of the English

Companies Act, 1929.

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Some formal amendments were made by the Adaptation of Laws Order.

1950 on the date on which constitution of India came into force i.e. 26 January

1950. At the end of 1950, the government appointed a committee under the

chairmanship of Sri. H.C. Bhabha to look into the Indian Companies Act and to

suggest some measures for improving the Companies Act taking into consideration

the development of Indian trade and industry through all these years.

The Bhabha committee submitted its report in April 1952 covering almost

all aspects of the Company law. Based on the recommendation of the Committee

Report, a Bill was introduced in the parliament in 1953 which later on took the

shape of the present Company Act viz. the Companies Act, 1956 The major

amendments in the Act of 1956 came in the years 1960, 1962, 1963, 1964, 1965,

1966, 1967, 1969, 1974, 1977, 1985, 1988, 1991, 2000, 2002 and 2006.

It is pertinent here to have brief a look at the amendments.

(1) The Companies (Amendment) Act, 1960 :-

a. The amending Act was based on the recommendations of Shastri Committee

which was appointed by the government on 15 May, 1957.

b. Some restrictions were imposed on management of Companies, managerial

remuneration and private Companies.

c. A new class of Companies namely ‘Deemed to be Public Companies’ was

introduced.

(2) The Companies (Amendments) Act 1963 :-

a. The amending Act was based on the report of the Vivian- Bose Commission

instituted to inquire into the administration of the Dalmia – Jain group of

Companies.

b. By this amending Act, certain changes were incorporated in the Companies

Act to improve the efficiency of the Company administration and to prevent

abuses of power of management e.g. Section 10E of the amending Act

provides for setting up a ‘Board of Company Law Administration’ and

under section. 10A, a provision was made for setting up of a ‘Companies

Tribunal’. [(Companies Tribunal was abolished in 1967 by the Companies

(Tribunal Abolition Act, 1967)].

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(3) The Companies Amendment Act, 1965 :-

a. This third major amendment was based on the recommendations of

Daphtary-Shastri Committee.

b. The Act amends sec. 13 and provided that the objects clause in the

Memorandum of Association of any Company may be divided into two sub

clauses – (i) the main objects, and (ii) Other objects.

c. Restrictions were imposed on the period of currency of blank transfers by

adding sub-section (1A) to section 108.

d. ‘Advisory commission’ attached to the ‘Company Law Board’ was to be

replaced by an ‘Advisory committee’ by amending section 410.


a. The act prohibited Companies from contributing any amount to any political

party or for any political purpose.

b. Abolished the institution of Managing Agents and Secretaries and Treasures.


This Amended Act came to effectively implement the Contemporary socio-

economic policy of the Government. The Act sought to streamline the Company

administration and to promote greater efficiency and social justice in the working

of the corporate sector. The important features of the Act are :-

a. Insertion of new section 58A and 205 A(3) giving more legislative power to

the central government in matters of Company affairs.

b. Provisions regarding Foreign Company.

c. Some of the quasi – judicial powers previously exercised by Courts were

transferred to the Company Law board.

d. Company Law Board has been given the powers of a Civil Court to enforce

the attendance of witness and production of documents etc. and to punish for

its contempt.

e. Inclusion of the concept of ‘deemed to be public Companies’.

f. Prescribing strict disclosure norms before accepting deposits from the

public.

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g. The Act introduce new sections to prevent or regulate ‘take over’ of shares

in a Company by a ‘group’ or ‘combine’ having the common intention to

acquire control over the Company.

h. The central Government has been given the power to appoint as many

Directors as it thought necessary on the Board of Directors of a Company in

public interest. Previously it was two.

i. Compulsory appointment of a whole- time secretary for the Companies

having a paid a up share capital of rupees twenty five lakh or more.

(6) The Companies (Amendment Act, 1977.

a. By amending section 58 of the Companies Act, 1956 Central Government

has been empowered to prescribe, in consultation with the Reserve Bank of

India, The limits up to which and the condition subject to which, deposits

may be invited or accepted by a Company.

b. By amending section 220, it has been made absolutely essential for the

management to file copies of the Balance sheet and the Profit and Loss

Account with the registrar of Companies within a presided period, even

where the Annual General Meeting (AGM) has not been held in time.

c. Wide powers have been conferred on the Company Law Board in regard to

the execution of orders made by it under various sections.

d. The ceiling for donations for charitable purposes has been raised from Rs.

25,000 to Rs, 50,000.

(7) The Companies ( Amendment) Act, 1985-

The important changes brought about by that Act are:

a. Companies were permitted to make contributions, directly or indirectly, to

any political party or for any political purpose to any person, not exceeding

5% of their average net profits during the three immediately preceding

financial years, if a resolution authorizing such contributions are passed at a

meeting of the Board of Directors. Government Companies and Companies

which have been in existence for less than three financial years are

prohibited from making any political contribution. Prior to this Act, there

was a blanket ban on political contribution by all types of Companies.

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b. Section 396, dealing with the Central Government’s power to order

amalgamation of Companies in public interest, has been amended.

(8) The Companies ( Amendment Act, 1988 :-

This Amendment came as a result of the recommendations made by

the sacchar committee. Their salient features are:

a. Setting up of an independent Company Law Boards (LLB) having power to

regulate its own procedure. The decisions of the CLB on question of fact to

be final. However, the orders of the CLB will be appeal able to High Court

on question of law.

b. For a private Company to be treated as ‘Deemed public Company’ its

average annual turnover during three preceding years shall be Rs. 5 crores or

more instead of the existing Rs. 1 crore or more or if it accepts deposits from

the public through an advertisement.

c. It has been made obligatory for every Company intending to offer shores or

debentures to the public for subscription by the issue of prospectus, before

such issue, to make on application to one or more recognized stock

exchanges for permission to deal in the shares or debentures of the

Company.

d. Issuing of preference shares which are irredeemable or redeemable after a

period of 10 years, is prohibited hereafter.

e. Every public limited Company or a subsidiary thereof, having a paid up

share capital of Rs. 5 crores or more to compulsorily have a managing or

whole time director or a manager.


The major change brought about by this Act are :-

a. Amendment to section 17 of the Companies Act enables the Companies to

change the objects clause in their Memorandum of Association without

seeking approval of the Company Law Board

b. The Amendment Act, by amending section. So has increased the period of

redeemable preference shares to 20 years in place of 10 years.

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c. Mutual fund, venture capital funds and other SEBI recognized funds have

been granted voting rights for shares they hold in other Companies. Earlier

Public Trustees alone were allowed to vote.

d. Companies have been provided with the facility to the file their documents

with the Registrar of Companies in computerized format ie. Soft copy.

10. The Companies (Amendment) Act, 1999 :-

This Amendment Act is deemed to have come into force with effect from

31st October, 1998, the date of promulgation of ordinance by the president in this

regard.

The main provisions are:-

a. Nomination facility provided for depositors, share holders and debenture

holders by amending section 58A and by introducing section 109A and

109B.

b. By inserting section 77A, 77AA and 77B the right have been given to the

Companies to purchase their own shares or other specified securities under a

“buy back” scheme subject to SEBI guidelines in case of listed Companies

or Central Government guidelines in case of unlisted Companies and private

Companies.

c. Provision has been made for issue of “sweat equity shares” to directors or

employees of Companies by inserting section 79A.

d. “Investor Education and Protection Fund” was established for propagation

of knowledge as to matters of investment, by inserting section 205C.

e. A new section – section 372A, was introduced replacing section 370 and

372, to facilitate inter-corporate capital flows for meeting the demands of

liberalization.


This act came in order to provide certain measures of good corporate

governance and for ensuring meaningful share holders’ democracy in the working

of Companies. The changes brought about by this Act include: -

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a. Requirement of Minimum paid up capital: - Private Companies to have a

minimum paid up capital of not less then Rs. 1,00,000 and public

Companies must have a minimum period up capital of Rs. 5,00,000.

b. Small depositor :- Sections 58AA and 58AAA were introduced for the

protection of small depositors

c. Shelf Prospects, Information Memorandum and Red Herring Prospectus:-

Financial institution and banks, which have to make repeated offers of

securities in year, are permitted to issue a ‘shelf Prospectus’ instead of a

Prospectus. The Shelf Prospects to have a shelf life of one year. Any

changes in between can be told by issuing an ‘information memorandum’.

Information Memorandum as envisaged in section 60B recognizes book

building process. Information Memorandum is a document for eliciting the

demand for the securities and to ascertain the price and terms of the issue.

‘Red Herring Prospects’ is an incomplete prospectus. It does not contain

information regarding price and quantum of shares.

d. Non-voting equity shares – Section 86 was amended to allow issue of non-

voting equity shares by public Companies.

e. Postal Ballot – In order to get a wider participation of share holders voting

through postal ballot on a particular resolution has been allowed.

f. Audit committees – A new section – section 292A- has been added

providing for constitution of audit committees by every public Company

having a paid up capital of Rs. 5 crores or more. Further, the

recommendations of the audit committee on any matter relating to financial

management shall be binding on the Board.

g. Indian Depository Receipts – Section 605A permits Companies incorporated

outside India, whether having a place of business in India or not, to issue

Depository Receipts in India and thus raise capital funds from Indian public.

(12) Companies (Amendment) Act, 2001 :-

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This Act amended provision of section 77A relating to buy back of shares

allowing Board of Directors to buy-back shares upto 10% of the paid-up capital and

free reserves provided not more than one such buy-back is made during period of

365 days. Prior to this special resolution is required for buy-back of shares.

(13) Companies (Amendments) Act, 2002 :-

In December 2002, two Companies (Amendment) Acts Viz. Companies

(Amendment) Act, 2002 and Companies (Second Amendment) Act, 2002, were

passed.

The Important provision made through these Acts are :-

a. Producer Companies: - Setting up and regulation of co-operatives as body

corporate under the Companies Act, 1956 and to be known as producer

Companies.

b. Sick Companies – The second amendment act attempts to rationalize the

winding up process and to facilitate rehabilitation of sick Companies by

repeating SICA and dissolving BIFR. It seeks to establish a National

Company Law Tribunal (NCLT) providing it with powers for expediting the

winding up process so that the Company’s resources may be utilized for

better purpose rather than blocking them in sick undertakings.

(14) Companies (Amendment) Act 2006 :-

This Act has introduced various provisions relating to:-

a. Directors identification number (DIN) : - DIN to be issued to Directors, and

no fresh appointment or re-appointment of any individual as director unless

such an individual has been allotted DIN.

b. Governance and E-filing – The central government has notified the

Companies (Electronic Filing and Authentication of Documents) Rules

2006, providing for e-tiling of forms, applications, documents and

declarations in Portable Document Format (PDF) and authentication thereof

using digital signature.

Summary

The origins and development of Company law in India is based on the English

Company Law. Whatever Company legislations have been passed in England from

time to time has been followed by the Indian law with certain modification. The

Companies Act, 1956 is said to follow the U.K. Companies Act, 1948. Charters

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were granted to the members of the guilds by the Crown which gives them a

monopoly in respect of particular trade. These associations were either formed as

‘Commenda’ or ‘Societas’.

During the 14th century certain merchants adopted the word ‘Company’ for their

overseas ventures. This ‘Company was an extension of the merchant guilds in

foreign trade. By the close of the 16th century Royal charter were issued which

granted monopoly of trade to members of the Company over a certain territory. The

Companies were known as regulated Companies, one example of which is East

India Company established by charter in 1600.

By the close of the 17th century all these Companies or merchant guilds had

established permanent fixed capitals represented by shares which were freely

transferable. The property of the Company was to be controlled by the governors or

directors for the purpose of carrying on the business and was not to be divided

between members at intervals of time.

Till then the only method of incorporation a Company was by Royal Charter

or by Act of parliament. The methods were quite expensive and time consuming.

Thus many Companies came into existence by agreement and without

incorporation. Consequently, there was spurt of many Companies having

speculative or even fraudulent schemes. The scheme of the South Sea Company is

the best example of the notorious Company floatation at that time.

To check the emergence of the Companies of the Companies with

speculative or fraudulent motives the Bubble Act, 1720 was passed. The Act

prohibited the floating of a corporation unless authorized by an Act of Parliament

or Royal charter. As a result of the passing of the Bubble Act Companies

disappeared like the bursting of the bubble.

In 1856, the English Companies Act was enacted (the Joint Stock

Companies Act, 1856), which repeated both the Acts of 1844 and 1855. Under the

Act of 1856, seven or more persons could form themselves into an incorporated

Company with or without limited liability by signing memorandum of association.

The Act of 1856 was repealed by the Act of 1962 The Act was further repealed by

the Acts of 1908, 1928, 1948, 1967, 1976, 1980, 1981 and 1983. In 1985, the whole

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of the existing law relating to Companies was consolidated in the Companies Act,

1985 which is the present statute governing Companies in England.

The Company legislation in India has closely followed the English

Companies Legislation. The Indian Company Law originates in the year 1850 when

the first Indian Companies Act was enacted on the lines similar to the English

Companies Act of 1844. The Act of 1850 provides for the first time in India

registration of joint stock Companies. In 1857, another Act, closely following the

English Companies Act y 1855, was passed, which extended the privilege of

limited liability to joint stock Companies excepting Banking and Insurance

Companies. The Indian Companies Act, 1860 was enacted on the lines of the

English Companies Act and extends the privilege of ‘limited liability’ to Banking

and Insurance Companies as well. The first comprehensive legislation was enacted

in the in the year 1866 on the model of the English Companies Act of 1862 and

provided for the incorporation, regulation and winding up of Companies. The Act

was amended several times in 1882, 1887, 1891, 1895 and 1910, till we had a

consolidating Act – ‘The Indian Companies Act, 1913’ – which brought Indian law

at par with English Companies Act of 1908. It was by this Act that the institution of

‘Private Company’ was for the first time introduced in the Indian Company Law.

The Act of 1913 was further amended in the year 1914, 1915, 1920, 1926, 1930

and 1932. The Act was extensively amended in 1936 on the lines of the English

Companies Act, 1929.

Some formal amendments were made by the Adaptation of Laws Order.

1950 on the date on which constitution of India came into force i.e. 26 January

1950. At the end of 1950, the government appointed a committee under the

chairmanship of Sri. H.C. Bhabha to look into the Indian Companies Act and to

suggest some measures for improving the Companies Act taking into consideration

the development of Indian trade and industry through all these years.

The Bhabha committee submitted its report in April 1952 covering almost

all aspects of the Company law. Based on the recommendation of the Committee

Report, a Bill was introduced in the parliament in 1953 which later on took the

shape of the present Company Act viz. the Companies Act, 1956 The major

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amendments in the Act of 1956 came in the years 1960, 1962, 1963, 1964, 1965,

1966, 1967, 1969, 1974, 1977, 1985, 1988, 1991, 2000, 2002 and 2006.

Check your progress

1. Discuss briefly the history of company legislation in India and bring out clearly the special features of the Companies act, 1956.

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UNIT-2 CORPORATE PERSONALITY

STRUCTURE

2.0. Introduction

2.1. Objectives

2.2. Concept of corporate personality.

2.3. Characteristic features of a company

2.4. Distinction between company and partnership.

2.5. Doctrine of ‘lifting the veil’ of corporate personality.

2.6. Advantages and disadvantages of incorporation

2.7 Summary

2.8. Check your progress.

2.0. Introduction

In this unit we shall learn the concept and characteristics of corporate personality. Literally the word company means a group of persons associated for any common object such as business, charity, sports and research etc. Almost every partnership firm having two or more partners may, therefore, style itself as a company. But this company is not a company in the legal sense of the term. We shall be using the word company strictly in legal sense, i.e. a company incorporated or registered under the Companies Act. We shall also discuss the various circumstances prompting the courts to lift the corporate veil or break the corporate shell to peep inside and to identify the actual persons involved in case of fraud or any improper conduct as these members/directors are the limbs of the company.

Also, we shall discuss the advantages and disadvantages of incorporation.

2.1. Objectives

The main objective of this unit is to understand the concept of corporate personality. After completing this unit you will be able to:

Have an idea of the incorporation of a company.

Learn the characteristic features of a company.

Understand the circumstances in which the veil of corporate personality can be lifted to see the actual persons behind the legal façade.

Understand the distinction between a partnership and a company.

Get an understanding of advantages and disadvantages of incorporation.

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2.2. Concept of Corporate Personality

Company:-

The word ‘company’ has no strict technical or legal meaning literally the word means a group of persons associated for some common object or objects such as business, sports, charity etc. But, in common parlance, the word ‘company’ is normally reserved for those associated for economic purposes, i.e. to carry a business for gain. Thus it can be said that ‘company’ in simple terms, may be described as a voluntary association of persons who have come together for carrying on some business and sharing the profits there from.

Section 3(1) (i) and (ii) of the companies Act, 1956 define a company as “a company formed and registered under this Act or an existing company.” An existing company means a company formed and registered under any by the previous company law.

The above definition does not give any indication about the features of a company. In order to understand the meaning of a company we should have a look at the definition given by different authorities.

Lord Justice Lindley :- “A company is an association of many persons who contribute money or monies worth to a common stock and employed 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 contribute to it or to whom it pertains 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.”

Chief Justice Marshall: - “A corporation is an artificial being, invisible, intangible, existing only in contemplation of the law. Being a mere creation of law, it possesses only the properties which the charter of its creation confers upon it either expressly or as incidental to its very existence”.

A more comprehensive legal definition of a company giving its main essentials has been given by Prof. Honey – “a company is an artificial person created by law, having separate entity, with perpetual succession and common seal.”

A company, thus, may be defined as an incorporated association which is an artificial person, having a separate legal entity, with a perpetual succession, a common seal, a common capital comprised of transferable shares and carrying limited liability.

2.3. Characteristic features of a company :-

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1. Incorporated association: - A must necessarily to be incorporated or registered under the Companies, Act. Minimum number required for this purpose is seven in the case of a ‘Public company’ and two in case of a 'private company' (Section 12). Registration creates a joint stock company and it is compulsory for all the associations having membership of more then ten persons in the case of banking business and 20 persons in other commercial activities, otherwise the association would become illegal (Sec. 11).

2. Distinct legal entity : - A company is a legal person having a distinct juristic personality entirely independent of the individual persons who are for the time being its members. The first case on the subject (even before the famous soloman’s case) was that of Kondoli Tea Co. Ltd., Re ILR (1886). In this case certain persons transferred a tea estate to a company and claimed exemption from ad valorem duty on the ground that they themselves were the shareholders in the company and therefore, it was nothing but a transfer from them in one to themselves under another name. Calcutta HC rejected this contention and observed that the company was a separate person, a separate body altogether from the shareholders and the transfer was as much a transfer of property, as if the shareholder had been totally different persons. A Company is not merely the sum total if its component members, but it is something superadded to them. Even if a shareholder owns virtually the whole of its shares, the company is a separate legal entity in the eyes of law as distinguished from such a shareholder. This principle was judicially recognized by the house of lords in the famous case of Soloman V. Soloman & Co. Ltd, [1895-99] A11.ER33(HL). In this case Soloman was a prosperous leather merchant. He converted his business into a limited company – Soloman & Co. Ltd. The Company so formed has Soloman, his wife and five of his children as members. The company purchased the business of Soloman for £ 39,000, the purchase consideration was paid in terms of £ 10,000 debentures conferring a charge over the company’s assets, £ 20,000 in fully paid £ 1 share each and the balance in cash. The company in less then one year ran into difficulties and liquidation proceedings commenced. On winding up the state of affair of company was that it has assets of £ 6000 and liabilities of £ 10,000 towards Soloman as debenture holder and £ 7,000 towards unsecured emendators. Thus its assets were running short of its liabilities by £ 11,000. The unsecured creditors claimed priority over the debenture holder (i.e. Soloman) on the ground that a person cannot own to himself and that Soloman and the company were one and the same person. They also conducted that the company was merely agent of Soloman, the business was solely his, consented solely for him and by him and the Company was a mere sham and raved.

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The house of Lords unanimously held that the company had been validly constituted, since the Act only required seven members holding at least one share each. It said nothing about their being independent, or that there should be anything like a balance of power in the constitution of the company. Hence the business belonged to the company and not to Soloman. Soloman was its agent. The Company was not the agent of Soloman Similarly in the case of Lee V. Lee’s Air farming Ltd. [1960] 3A11. ER 420(PC), Lee formed a company with a share capital of £ 3,000 of which £ 2999 were held by Lee. He was also the sole governing director. In his capacity as the controlling shareholder, he exercised full and unrestricted control over the affairs of the company. Lee was a qualified pilot also and was appointed as the chief pilot of the company under the articles and drew a salary for the same. While flying the company’s plane he was killed in an accident. As the workers of the company were insured, workers were entitled for compensation on death or injury. The question was while holding the position of sole governing director, could Lee also be an employee of the company. It was held that the more fact that some one was the director of the company was no impediment to his entering into a contract to serve the company. If the company was a legal entity, there was no reason to change the validity of any contractual obligations which were created between the company and the deceased. The contract could not be avoided merely because Lee was the agent of the company in its negotiations. Accordingly, Lee was an employee of the company and, therefore, entitled to the claim of compensation.

It is interesting to note that being a person a company even enjoys fundamental rights similar to the natural persons. Thus, it was held in Chiranjilal Chauthry V. Union of India (1951) 21 Comp. Cas 33(SC), that if a fundamental right of a company is infringed, it is the company and not shareholders which can challenge infringement.

Although a company is a legal person having nationality in accordance with the country of its incorporation and a domicile in accordance with the place or state of its incorporation or registration, it is not a citizen State Trading Corporation of India Ltd. V. Commercial Tax Officer, (1963) S.C.J. 605. A company cannot, therefore, claim the protection of those fundamental rights which are expressly guaranteed to citizen only e.g. the right of franchise.

3. Artificial Person: - The company, through a justice person, does not possess the body of a natural being. It exists only in the eyes of law. Being an artificial person, it has to depend upon natural person, namely, the directors, officers, shareholders, etc., for getting its various works done. However, these individuals only represent the company and accordingly whatever they do within the scope of the authority confirmed upon them and

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in the name and on behalf of the company, they bind the company and not themselves.

4. Limited Liability : - One of the important advantages of formation of a company is that the members of the company are only liable to contribute towards payment of its debts to a limited extent. If the company is limited by shares, the shareholders' liability to contribute towards the debt of the company is limited to the amount unpaid on their shares howsoever heavy losses the company might have suffered. However, companies may be formed with unlimited liability of members or members may guarantee a particular amount, and then their liability is limited to the guaranteed amount.

5. Perpetual Succession :- Since company is an artificial person, it can not be incapacitated by illness and does not have an allotted span of life. Being distinct from the members, the death, insolvency or retirement of its members does not affect the Company. Members come and go but the company can go forever. It continues of may even if all its human members are dead. Law creates it and law alone can dissolve it. “King is dead, long live the king” very aptly applies to the company from of organisation.

6. Common Seal :- A company being an artificial person has no body similar to a natural person. It does not have a mind or limbs of human being. It acts through natural person namely, the directors and other officers and employees of the company. But it can be held bound by only those documents which bear its signature. Common seal is the official signature of a company.

However, in SICAL – CWT Distriparks Ltd. V. Besser concrete systems Ltd. (2003) 46 SCL 196 (Mad.) it was held that it is not necessary that agreement executed on behalf of company should bear seal of company, but question whether agreement is valid or not depend upon facts of each case.

7. Transferability of Shares :- The shares of a public company are freely transferable and members can dispose of their shares whenever they like without seeking any permission from the company or the other members. In a private company, however, some restriction on the right to transfer shares is essential in its articles as per section 3(i) (iii) of the companies Act, 1956, but absolute restrictions on the right of the members to transfer shares contained in the articles shall be void.

2.4. Distinction between Company and Partnership :-

The main points of distinction can be summarized as under :-

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1. Regulating Act :- A company is regulated by the companies Act, 1956 whereas a partnership firm as governed by the provisions of the partnership Act, 1932.

2. Number of members :- The Maximum number of members in the case of a firm is fixed at 10 banking business and at 20 for any other business; but no such maximum limit is fixed in the case of a public company. However, the maximum number of members of a private company must not exceed 50 excluding members who are or were in the employment of the company.

Maximum Number : - The maximum number of members in a public company is seven and in case of a private company two. In case of a partnership the minimum numbers of partners is two.

3. Liability :- In partnership each partner has unlimited liability and is personally liable for all debts of the firm. In a company, a shareholder has limited liability – limited to the extent of the unpaid amount on the shares held by him or the amount guaranteed by him to be his contribution.

4. Entity- One important attribute of a company is that it is an artificial person and has a distinct entity separate from its members. A partnership, on the other hand, does not have a distinct legal entity separate from the members composing it and an its existence comes to an end upon the death or lunacy or insolvency of its partners.

5. Capital :- The capital of a firm can be changed by the mutual consent of the partners while such a change in the case of a company involves certain legal formalities.

6. Management :- All the partners of a firm are entitled to take part in the management of the business, but in the case of a company management is in the hands of the board of directors elected by the shareholders.

7. Transfer of interest :- A partner cannot transfer his interest in the firm without the consent of all other partners. In the case of a private company, the transfer of shares requires the prior permission of the board of directors. But in the case of a public company a shareholder can transfer his shares freely without restriction and the transferee gets all the rights of membership.

8. Registration :- A partnership from may or may not be registered but in the case of a company registration is essential.

9. Audit :- The audit of the accounts of a company is a legal obligation but not so in the case of a partnership. For partnership audit is essential only if the annual total sales, turnover or gross receipts in business exceed Rs. 40 lakes.

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10. Winding up :- If the partnership is ‘at will’ then it can be dissolved or wound up at any time without going through any legal formalities, whereas in the case of a company, no one member can require it to be wound up at will and moreover winding up involves legal formalities.

2.5. Doctrine of ‘lifting the veil’ of corporate personality :-

The main advantage of incorporation from which all others follow is the separate legal entity. Through a company has a distinct personality apart from its members, but in reality the business of the artificial person (company) is always carried on by, and for the benefit of some individual. In the ultimate analysis some individuals are the real beneficiaries of the corporate advantage. It may, therefore, happen that the corporate personality of the company is used to commit frauds or improper or illegal acts. Since an artificial person is not capable of doing anything illegal or fraudulent, the facade of the corporate personality might have to be removed to identify the persons who are really guilty. This is known as ‘lifting the corporate veil’.

“Thus where the law disregards the corporate entity and pays regard instead to the individual members behind the legal façade, it is known as lifting the veil of corporate personality” (Gower L.C. B., The principles of modern company Law”).

The circumstances under which the courts may lift the corporate veil may broadly be grouped under the following two heads :-

I. Under statutory provisions.

II. Under judicial interpretations.

I. Under statutory Provisions : -

The veil of corporate personality may be lifted in the following cases as per express provisions of the companies Act, 1956.

1. Reduction of membership below statutory minimum (Section 45).

If, at any time, the number of members of a company is reduced below the statutory minimum i.e. below 7 in the case of public company, or below 2 in case of a private company, and the company carries on business for more than 6 months while the number is so reduced, every person who is a member of the company at the time the company so carries on business after those 6 months and is aware of the fact shall be severally liable for the payment of company’s debts, contracted during that time. (Section 45).

Thus the law pierces the ‘corporate veil’ and makes persons behind the company personally liable, and the privilege of limited liability of shareholders is lost.

2. Misrepresentation in Prospectus. (Section 62 & 63) :-

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In case of misrepresentation in prospects, every director, promoter and every other person, who authorizes such issue of prospectus is liable to the persons who have subscribed for shares on the faith of untrue statement (Section -62), Also, criminal liability may be imposed with imprisonment upto 2 years or fine upto Rs. 50,000 or both. (Sec. 63).

3. Failure to return application money:(Sec. 69):-

As per Company Acts:- If the company fails to receive minimum subscription within 120 days after the date of first issue of the prospectus, it most refund the entire application money within next 10 days failing which it shall have to refund the same with interest @ 6%.

SEBI Guidelines have brought in some changes in the above law and can be reread as:-

If the company fails to receive minimum subsection on the closure of the issue, if the issue is not underwritten and within 60 days closure of issue, if the issue is underwritten, it most refund the entire application money within next 8 days failing which it shall have to refund the same with interest @15% per Annum.

4. Failure to deliver share certificate etc. Within stipulate time period (Sec. 113).

According to section 113 (2) it a company fails to deliver the share or debenture stipulate within 3 month of allotment and within 2 months of application for transfer, than the company as well as every officer of the company who is at felt shall be punishable with fine up to Rs. 5000 Per day till such default witness.

5. Mis-description of name ( Sec. 147)- where officer of a company signs on behalf of the company any contract, bill of exchange, hundi, cheque promissory note or order for money, such person shall be personally liable to the holder if the name of the company is either not mentioned, or is not properly mentioned.

6. Holding Subsidiary Company. (Sec. 212)- A holding company is required under section 212 of the companies Act, 1956, to disclose to its members the account of its subsidiaries. It provides that every holding company shall attach to its balance sheet, copies’ of the balance sheet, profit and loss account, director’s report and Auditor’s report, etc. in respect of each subsidiary company. It amounts to lifting the corporate veil because in the eyes of law a subsidiary is a separate legal person and through this mechanism their identity is known.

7. For facilitating the task of an inspector appointed under section 235 or 237 to investigate the affairs of the company. (sec.239)-

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According to this section, if it is necessary for the satisfactory completion of the task of an inspector appointed to investigate the affairs of the company for alleged mismanagement or oppressive policy towards its members, he may investigate into the affairs of another related company in the same management or group.

8. For investigation of ownership of company (Sec. 247) –

As per section 247, the central Government may appoint one or more inspectors to investigate and report on the membership of any company for the purpose of determining the true persons who are financially interested in the company and who control its policy or materially influence it.

9. Fraudulent Conduct (Sec. 542) :- Where in the case of winding- up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or any other person, or for any fraudulent purpose, those who are knowingly parties to such conduct of business may, if the count thinks it proper, so to do, be made personally liable without any limitation as to liability for all or any debts or other liabilities of the company. Liability under this section may be imposed only if its is proved that the business of the company has been carried on with a view to defraud the creditors-Re, Augustus Bannett & sons Ltd. (1986) B CLC 170 Ch.D.

10. Liability for ultra-vires Acts :- Directors and other officers of a company will be personality liable for al those acts which they have done on behalf of a company if the same are ultra-vires the company.

11. Liability under other statutes :- The Directors and other officers of the company may be held personally liable under the provision of other statutes eg. under the income Tax Act, where any private company is wound up and if tax arrears of the company in respect of any income of any previous year cannot be recovered, every person who was director of the company at any time during the relevant previous year shall be jointly and severally liable for payment of tax. In a similar manner, under Foreign Exchange Management Act, 1999, the directors and other officer may be proceeded individually or jointly for violations of the Act.

II- Under Judicial Interpretations: - There may be various circumstances under which the court may feel compelled to lift the corporate veil in its judicial pronouncements. Following are some of the indicative cases to get an idea as to the kind of circumstances under which the facade of corporate personality will be removed or the persons behind the corporate entity identified and penalised, if necessary.

1. Protection of revenue :- In sir Dinshaw Maneckjee Petit, Re AIR 1927 Bom. 371, the assessee was a millionaire earning huge income by way of

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dividend and interest. He formed four private companies and transferred his investments to each of these companies in exchange of their shares. The dividends and interest income received by the company was handed back to Sir Dinshaw as a pretended loan. It was held that the company was formed by the assessee only as a means of avoiding tax and company was nothing more than assesses himself.

2. Prevention of fraud or improper conduct :- Where the medium of a company has been used for committing fraud or improper conduct, the courts have lifted the veil and looked at the realities of the situation. A very important case on the point is Gilford Motor company V. Horne (1933) 1 CH935. In this case ‘Horne’ had been employed by the company under an agreement that he shall not solicit the customers of the company or compete with it for a certain period of time after leaving its employment. After ceasing to be employed by the plaintiff, Horne formed a company which carried on a competing business and allotted whole of its shares to his wife and an employee of the company, who were appointed to be its directors. It was held that since the defendant (Horne) in fact controlled the company, its formation was a mere ‘cloak or sham’ to enable him to break his agreement with the plaintiff. Accordingly, an injunction was issued against him and against the company he had formed restraining them from soliciting the plaintiff’s customers.

3. Determination of the enemy character of a company – Since the company is an artificial person, it cannot be an enemy or a friend. However , during war, it may because necessary to lift the corporate veil and see the persons behind as to whether they –our enemies or friends. It is because, through company enjoys a district legal entity, it affairs are essentially run by individuals. In Daimler company Ltd. V. Continental Tyre and Rubber Co, (Great Britain) Ltd. (1916) 2 AC 307, a Company was incorporated in London for the purpose of selling tyres manufactured in Germany by a Herman Company. Its majority shareholder and all the directors were Germans. On declaration of was between England and Germany in 1914, it was held that since both the decision making belies, the Board of Directors and the general body of shareholders were controlled by Germans, the company was a German company and hence, an enemy company. Accordingly, the suit fled by the company to recover a trade debt was dismissed on the ground that such payment would amount to traveling with enemy.

4. In case of economic offences – In case of economic offences a curt is entitled to lift the veil of corporate empty and pay regard to the economic realities behind the legal façade Santanu Ray V. Union of Indian (1989) 65 Comp. CFas. 196 (Delhi).

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5. Where company is used to avoid welfare legislation – Where the sole purpose for the formation of the new company was to use it as a device to reduce the amount to be paid by way of bonus to workmen, the supreme count oplled the piercing of the veil) to look at the real transaction – workmen of Associated Rubber industry Ltd. V. Associated Rubber Industry Ltd. (1986) 59 Lone) G.S. 134.

6. To punish for contempt of court. – The case on the point is Jyoti Limited V. Kanwaljit Kavr Bhasin (1987) 62 Comp. Cas-626 (Delhi) – A firm of two partners agreed to sell two floors to parties but cancelled the agreement. Litigation followed and the High Court restrained the firm from selling the property. In the meantime, a private company was floated by the two partners who being the only two shareholders became the chairman and the Managing Director respectively and the property was transferred to the Company. Inspite of the High Court’s restraint order the company sold off the two floors. In answering to the contempt proceedings, the partners of the firm took the plea that the sale had been made by the company and therefore the firm had not disobeyed the Court’s order.

It was hold that – after lilting the corporate veil it has become clear that the orders of the Court were disobeyed by the respondents. The company was promoted by the respondents alone. They only were its shareholder and directors. The entire interest in the company was of the respondent. Thus in reality the order of the court was disobeyed by the respondent.

2.6. Advantages and disadvantages of incorporation

Advantages – An incorporated company has the following advantages when compare to other types of associations.

1. Independent Legal Entity :- Being independent legal entity district from its members the company remains free from the hazards of all personal misfortunes of its members.

2. Limited Liability :- A company can be formed with the liability of its members limited either to the paid part the share capital held by him (case liability is limited by share) or to the amount guaranteed by him (in case liability is limited by guarantee).

3. Perpetual Succession :- Section 34(2) declares that an incorporated company has perpetual succession meaning thereby that motivate intending any change in its members, the company will be the same entity with the same privileges and immunities, estate and possessions. It can continue to exist indefinitely till it is wound up in accordance with the provision of the companies Act, This is a district advantage over a partnership whore the

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death, insolvency, insanity or separation of members/partners may result in the dissolution of the firm.

4. Transferability of Shares :- According to section-82 of the companies Act the shares, debentures or other interests of any member in a company shall be movable property, transferable in the manner provided by the articles if the company.

5. Infinite membership – One improvident advantage of incorporation is that there is no limit to the maximum number of members in a public company. Thus any number of person may join hands by purchasing shares. As a consequence of this special feature large amount of capital can be collected by a joint stock company enabling it to undertake business on a large scale.

6. Separate property :- The property of the company is not the property of the shareholder, it is the property of the company Gramophone & Typewriter Co. V. Stanley (1906) K.B. 856.

Thus no member or director can use the properties of the company to his own personal advantage. Even a member holding majority shares or a managing director of a company is held liable for criminal misappropriation of the funds or property of the company, if he unauthorized takes it away and uses it his personal purposes.

7. Base in Control and Management :- The company law provides for the management of joint stock companies through elected representatives of the members know was directors and therefore every shareholder has not to worry about the management of the company. This is not so in the case of partnership. Also, only majority voting power is needed to control a company and not by consent of all members as in partnership.

Disadvantage :-

As against the advantage of incorporation discussed above, there are few disadvantages also. Some very obvious disadvantages are:-

1. Formality and Expense :- An incorporated company involves a number of formalities and expense throughout life. The affairs of company have to be conducted strictly in accordance with the applicable legal provision, non-compliance of which entails penal conferences. A number of documents are to be filed with the Registrar of companies of the state in which the registered office is to be situated and necessary stamp duty, registration fees and filing fees are to be paid at the time of incorporation of a company, various sections and documents are required to be filed with the Registrar of companies certain books and registers are compulsorily required to be maintained. Approvals and section of the company law board, the central Government, the count, the Registrar of companies or other appropriate

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authority are required to be obtained for certain corporate activities. Meetings of the directors or shareholders are to be held and conducted in accordance with the provision of the Act.

Other forms of business organizations are comparatively free from these legal compulsions and formalities.

2. Loss of privacy :- Another disadvantage of corporation is loss of privacy. A public company will have to publish its constitution, directorates, capital structure, charges on its assets, proceedings of general meetings and final accounts etc., by filling prescribed documents with the Registrar of the companies. The office of the Registries of companies is a public office. Any member of the public can, on payment of prescribed fees, inspect any of the documents filed by a public company with the Registrar y companies. Even in the case of private companies the same exposure is there though some what restricted.

3. Divorce of control from ownership : - Members of a company cannot have as effective and ultimate control over its working as in partnership or proprietary business. This is particularly so where the membership of the company is too large. The company functions through the representatives of the shareholders – the directors. Members, therefore, do not have any active and complete control over the company’s working, as the partners may have over the firms affairs or a sole protractor may have in his business.

4. Greater public accountability :- Any company and particularly a public company has much greater public accountability in as much as, it con not act against public interest. As and when public interest will come in conflict with the corporate working, intervention by signatory authorities will come.

5. Possibility of travels :- Since the control of economic resources is in few hands, it is possible for those few to deferred suspecting other people who have contributed funds to the company either as shareholder or debenture holder or creditor or lender by diverting funds of the company to their private channels. By the time the regulatory authorizes or other common stock holders come to realize the matter, the damage is already clone and clever manipulation offer makes it difficult to responsibilities and bring to book the wrong doers.

2.7 Summary

'Company' in simple terms means a voluntary association of persons who have come together for carrying on same business and sharing the profits there from. Section (1) (i) and (ii) of the Companies Act defines a company as a company formed and registered under those Act or an existing company.

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From the definitions givens by Lord Justice Lindley, Chief Justice Marshall, Prof. Haney etc we can gather that the characteristics features of a company are incorporated association, distinct legal entity, artificial personality, limited liability, perpetual succession, common seal free transfer of shares.

The 'corporate veil' of the company may be lifted in certain cases to identify the persons who are guilty of any fraud or improper conduct. There are certain circumstances provided by the statue itself and certain circumstances provided through judicial pronouncements under which the 'corporate veil' may be lifted viz. Reduction of membership below statutory minimum, Misrepresentation in Prospectus, Failure to return application money, Failure to deliver share certificate etc. Within stipulate time period, Mis-description of name, For investigation of ownership of company, Fraudulent Conduct, Liability for ultra-vires Acts, Protection of revenue, Prevention of fraud or improper conduct, Determination of the enemy character of a company, To punish for contempt of court, etc. The company from of organisation offers certain distinct advantages over other association of persons. These include: Independent legal entity, limited liability of members, perpetual succession, transferability of shares, infinite membership, separate property, ease in control and management.

Company form of organisation is however, not an unmixed blessing Disadvantages of incorporation include: Formalities and expense, loss of privacy, divorce between ownership and control, greater tax burden and detailed winding –up procedure.

A 'company' should however, be distinguished from a 'body corporate'. The expression 'body corporate' is a wider expression than 'company'. 'Body corporate' includes, besides a 'company', a company incorporated outside India, public financial institutions, nationalized banks and any other association of persons declared as a body corporate by the Central Government.

2.8 Check Your Progress

1. Discuss the notion of corporate personality in the light of the decision given in Solomon v. Solomon &Co. Ltd.

2. Elaborate the doctrine of lifting the corporate veil. How far does it ensure protection to third parties.

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UNIT – 3 KIND OF COMPANIES Structure 3.0 Introduction 3.1 Objectives 3.2 Classification of Different Types of Companies 3.3 Kind of Companies According to Mode of Incorporation

3.3.1 Statutory Company 3.3.2 Incorporated Company or Registered Companies

3.4 Kinds of Registered Companies on the basis of Member's Liability 3.4.1 Companies Limited by Shares 3.4.2 Companies Limited by Guarantee

3.5 Kind of Registered Companies on the Basis of Number of Members 3.5.1 Private Company 3.5.2 Public Company 3.5.3 Exemptions and Privileges of a Private Company 3.5.4 Conversion of Private Company into Public Company 3.5.5 Conversion of Public Company into Private Company

3.6 Other Kinds of Companies 3.6.1 Licenced Companies or Companies not for profit 3.6.2 Foreign Companies 3.6.3 Government Companies 3.6.4 Holding and Subsidiary Companies 3.6.5 Investment Companies 3.6.6 Public Financial Institutions 3.6.7 Producer Companies 3.6.8 One Man Company 3.6.9 Unregistered Company

3.7 Summary 3.8 Test Your Knowledge

3.0 IntroductionAfter learning the concept of corporate personality, its main characteristics and its advantages and disadvantages in Unit 2, we shall have a glimpse of the various kinds of companies which can be incorporated under the Companies Act and otherwise.In this unit our emphasis will be on understanding the classification of different kinds of companies and their characteristic features. We will make a detailed analysis of the characteristics of private companies, public companies, their conversion, exemptions granted to them and various new form of companies which have emerged as the companies took up diverse functions viz. investment companies, public financial institutions, producer companies etc.

3.1 Objectives

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The main aim of this unit is to study the classification of the companies and the basis of such classification. After completing this unit you will be able to:

Learn the classification of companies. Learn the characteristic features of different type of companies. Understand the concept of Foreign companies, Government companies,

Investment companies, Public Financial Institutions, Producer companies etc.

3.2 Classification of Different Types of Companies

The Companies Act, 1956 provides for a variety of companies that may be promoted and registered under the Act. The two common type of companies which may be registered under the Act are :-

(a) Private Companies

(b) Public Companies

These Companies may be incorporated either as limited liability companies or as unlimited liability companies.

Limited liability companies may be :

(i) Companies limited by shares;

(ii) Companies Limited by guarantee

(iii) Companies limited by guarantee as well as by shares.

When seen from different point of views, companies may be classified into various categories. Some of them are :-

1. Kind of companies according to the mode of incorporation

2. Kind of registered companies on the basis of number of members.

3. Kinds of registered companies on the basis of liability of members.

4. Other kinds of companies like licenced companies, foreign companies, one man company etc.

3.3 Kinds of Companies According to the Mode of Incorporation

A company may be incorporated either by a special Act, of legislature or under the Companies Act and thus a company may be statutory company or incorporated company.

3.3.1 Statutory Company

A statutory company came into consistence by a special Act passed either by the Central or State legislature. Companies intending to carry on same business of

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national importance are formed in this way. Reserve Bank of India (RBI), State Bank of India (SBI), Life Insurance Corporation (LIC), Food Corporation of India (FCI), Unit Trust of India (UTI) etc. are same examples of statutory companies.

Statutory companies are not required to have a memorandum of association as the powers which are to be exercised by such companies are defined by the Acts constituting them. The audit of such companies is conducted under the supervision and control of the auditor General of India. Although each standing companies is governed by the provisions of its special Act, the provisions of the Companies Act, 1956 also apply to them, in so far as the said provisions are not inconsistent with the previsions of the special acts under which these companies are farmed.

3.3.2 Incorporated Company or Registered Company

A company registered under the Companies Act, is known as 'Incorporated' or 'Registered' Company. All existing companies in India, a part from statutory companies, have been formed in this way and are governed by the provisions of the Companies Act, 1956. It is precinct to note here that the there are various insurance, banking and electric supply companies, which, though incorporated under the Companies Act, are largely governed by their Special Act, viz. The Insurance Act, 1938, the Banking Registration Act, 1949 and the Electric Supply Act, 1948. The provisions of Companies Act are still applicable to such companies, but only to extent as are not inconsistent with the provisions of the special Acts governing them.

3.4 Kind of Registered Companies on the Basis of Member's Liability

On the basis of liability of member, there types of companies be registered under the Companies Act, namely-

(i) Companies limited by shares

(ii) Companies limited by guarantee

(iii) Unlimited companies

Each of these types may be a 'public company' or 'private company.'

3.4.1. Companies Limited by Shares

These companies are popularly known as limited liability companies. In such a company, the liability of the members is limited to amount, if any unpaid on these shares respectively held by than. The liability can be enforced at any time during the existence and also during the winding up of the company. Such as company must have share capital as the extent of liability is determined by the face value of shares. Most of the companies is India are of this type and most of the provisions of the Companies Act are concerned with companies of this class.

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3.4.1 Companies Limited by Guarantee

Section 12(2)(b) of the Companies Act defines company limited by guarantee as "a company having the liability of its member limited by the memorandum to such amount as the members may respectively thereby undertake to contribute to the assets of the company in the event of its being wound up". The amount guaranteed by each member cannot be demanded upto the company is wound up, hence it is in the nature of 'reserve capital'.

Such companies may or may not have share capital. Generally they are formed without the share capital for non-trading purposes e.g. for the promotion of commerce, art, science, culture, sports, etc.

The chambers of commerce, trade, associations and sports, clubs are usually guarantee companies because neither they require huge capital nor aim at making profit. The articles of association of such a company must state the number of member with which the company is to be registered.

3.4.3 Unlimited Companies

A company having no limit on the liability of its member is an unlimited company [Sec. 12(2)(c)]. Thus, in the case of an unlimited, liability, company, the liability of each members extends to the whole amount of the company's debts and liabilities. Like partnership every member is liable to contribute, in proportion to his interest in the company, towards the amount required for payment in full of the total liabilities of the company, and if one is unable to contribute anything then the additional deficiency is to be shared among then the additional deficiency is to be shared among the remaining members in proportion to their capital in the company. But unlimited liability company is different form ordinary partnership in one important respect viz. creditors of such a company cannot the members directly and they can only resort to the winding up of the company and default as being a registered company it has a separate legal personality in the eyes of law. Also, the liability of the members is enforceable only at the time of winding up.

Such a company may or may not have share capital. The article of association of an unlimited company must state the number of members with which the company is to be registered and, if the company has share capital, the amount of share capital with which the company is to be registered [Sec. 27(1)].

As the capital, if any, is stated in the articles of association and not in the memorandum, it may b varied by passing a special resolution, without the sanction of the Court.

Again, an unlimited company is not subject to any restrictions regarding purchase of its own shares [Sec. 7]. According, such a company may purchase its own shares or advance monies to any person to purchase its shares.

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Under Section 32, a company registered as an unlimited company may subsequently convert itself into a limited liability company, subject to the provision that any debt, liabilities, applications or coulter its in regard to entered into, by or on behalf of the unlimited liability company before such conversion are not affected by such conversion.

3.5 Kinds of Registered Companies on the Basis of Number of Members

On the basis of the number of members a registered company may be – private company or public company.

3.5.1 Private Company

By virtue of the section 3(2) (iii) [as amended by the Companies (Amendment) Act, 2000], a private company means a company which has a minimum paid up capital of one lakhs rupees or such higher paid up capital as may be prescribed, and by its articles of association:

(a) restricts the right of the members to transfer shares, if any;

(b) limits the number of its members to fifty, excluding members who are or were in the employment of the company;

(c) prohibits invitation to the public to subscribe for any shares in or debentures of, the company;

(d) prohibits any invitation or acceptance of deposits from persons other then its members, directors or their relatives.

In the case of a private company having no share capital, articles of association need not contain any restriction regarding the right of members to transfer shares.

It is also to be noted that the Companies (Amendment) Act, 2000 has for the first time prescribed capital adequacy norm for incorporation of companies so that only genuine companies with serious business intentions come into existence.

Existing Private Companies – The Companies (Amendments) Act, 2000 further provides that every private company, existing on the date of commencement of this Amendment Act, having a paid up capital of less than one lakh rupees shall, within a period of two years from such commencements, enhance its paid upto capital to one lakh rupees. If it fails to enhance its paid up capital as specified above, such company shall be deemed to be a defunct company under section 560 and its name shall be struck off from the register of the companies maintained by the Registrar of Companies. A 'licenced company' registered under section 25 has been exempted from complying with the requirement of minimum paid up capital, as aforesaid.

The minimum number of members to form a private company is two i.e. two or more persons are required to subscribed their names to a memorandum of

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association. The subscribers to the memorandum may, however, be nominees of a single persons and subscribing their names may be merely a formality.

Any person who is competent to contract can be a subscriber. A company being a legal person can subscribe but a partnership firm cannot do so.

A minor cannot be a signatory to the memorandum since he is not competent to contract. The guardian of minor who subscribes to a memorandum on behalf of the minor be deemed to have subscribed in his personal capacity.

Again, a Joint Hindu Family, being not a person, cannot be a subscriber. A 'Karta' or manager of the Joint Hindu Family may however sign on its behalf.

Also, the words 'Private Limited' or any acceptable abbreviation thereof, such as 'Pvt. Ltd." must be added at the end of the name of a private company.

3.5.2 Public Company

As per section 3(i) (iv), as amended by the Companies (Amendment) Act, 2000, 'Public Company' means a company which :

(a) is not a private company;'

(b) has minimum paid up capital of five lakhs rupees or such higher paid up capital, as may be prescribed;

(c) is a private company which is a subsidiary of a company which is not a private company i.e. which is a subsidiary of a public company.

Existing Public Companies – Every public company exiting on the commencement of the Amendment Act, 2000, with a paid up capital of less than five lakh rupees shall increase its paid up, capital to five lakh rupees within a period of two years, from the commencement of the Amendment Act, failing which the company shall be deemed to be a 'defunct company' under secion 560 and its name shall be struck off form the register of companies. Also, a licenced company' registered under section 25 shall not be required to have minimum paid up capital as stated above. The minimum number of members required to from a public company is seven.

3.5.3 Exemption and Privileges of Private Companies

The exemption and privileges enjoyed by a private company are :

1. Only two persons may form themselves into private company (as against seven in case of public company) (Sec. 12).

2. As private company can commence business immediately on incorporation as it has not to wait to obtain a certificate for the commencement of business [Sec. 149 (7)].

3. A private company is allowed to work with only two directors as against

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at least three directors in case of a public company.

4. A private company is not required to prepare and file 'prospectus' or 'statement in lieu of prospects' with the registrar. [Sec. 70(3)].

5. A private company can proceed to allot shares without waiting to receive 'minimum subscription' [Sec. 69].

6. A private company is exempted from the requirements of hading statutory meeting and filing statutory report, whereas a public company must hold such meeting after one month and before six months from the date of obtaining the 'certificate to commerce business' in order to acquaint the shareholders about the details of the company's working till that day [Sec. 165].

7. A private company enjoys considerable freedom with regard to its directors, managing director or manger.

8. That restrictions on inter corporate loans and investments that are applicable on public companies do not apply to a private company. [Sec. 372 A].

9. A private company is free to make its own regulations by its articles in respect of general meetings, manner of taking vote etc. [Sec. 170].

10. Quorum required for general meeting of shareholder in case of a private company is two person personally present, unless provided otherwise in the articles whereas in the case of a public company, it is five persons personally present.[Sec. 174 (1)].

11. A private company in not required to keep an index of its members. [Sec. 151].

12. A private company can be registered with a paid up capital of Rs. 1 lakhs whereas a public company is required to have minimum paid capital of Rs. 5 lakhs.

13. No restrictions apply to the directors of a private company in respect of the number of company he can be appointed as director, whereas a director of a public can be director of not more than 15 public companies.

14. Directors of private company are not required to hold any qualification shares.

3.5.4. Conversion of Private Company into Public Company

A private company can be concerted into a public company in the following three manners –

1. Automatic conversions by default;

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2. Conversions by operation of law;

3. Deliberate Conversions or Conversion by Choice

Automatic conversion by default [Sec. 43]- Automatic conversion of a private company into a public company take place when a private company makes a default in complying with the essential statutory requirements as laid down in section 3(1)(iii) of the act (17 if it membership exceeds 50 or it permits free transferability of shares or extends invitation of public to subscribe to shares or debentures or to make deposits)becomes a public company automatically. As a consequence, the company shall cease to enjoy the privileges and exemption conferred on a private company and provisions of the Company Act shall apply to its as if it were a public company. However the Company Law Board [now Central Government vide (Second Amendment) Act, 2002]. may relieve the company from being treated as a pubic company, on such terms and conditions as its thinks just and equitable, if it is of opinion that the default was due to inadvertence or accident or some other sufficient cause, on an application of the company or any interested person.

It is pertinent to note have that a private company which becomes a public company automatically by virtue of the above provisions need not comply with and legal formality prescribed in the case of a deliberate conversion. Also, in spite of the conversion, such a company may retain the characteristics of a private company i.e. it can have restriction as to transfer of shares, membership and public subscription etc. It can continue to have only two directors and two members.

Conversion by operation of law (Deemed Public Company) [Sec. 43 A] - Section 43 A was introduced in 1960 to check misuse of private company status. Since private companies were conferred certain privileges and exemptions under the Companies Act, 1956, certain management incorporated their companies as private companies but employed substantial public funds. According to section 43A, (prior to amendment of 2000) a private company was deemed to be a public company in the following cases:

(i) If 25% or more of its paid up share capital is held by a public company or a deemed public company except where the said percentage is held by a banking company as a trustee or executor / administrator for any individuals.

(ii) If its average annual turnovers for last three financial years is Rs. 25 Crores or more.

(iii) If it holds 25% or more of the paid up share capital of public company.

(iv) If it invites, accept or renews deposit from public.

After the companies (Amendment)Act, 2000, a private company will not automatically become a public company on account of shareholding or turnovers.

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Deliberate Conversion or Conversion by Choice – A private company may be converted into a public company by following these steps:

Special resolution - A private company desiring to become a public company must pass a special resolution deleting from its articles the four compulsory restrictions given by section 3(1)(iii) as to membership, transfer of shares, public subscription and acceptance of public deposits. Also within 30 days of passing of special resolution, a copy of the special resolution so passed alongwith a copy of the altered articles and a copy of the 'prospectus' or a 'statement in lieu of prospectus' must be filed with the registrar.

For becoming a public company, the company will have to increase the number of its members to at least seven and that of its directors to at least three, if already their numbers was fewer than the aforesaid statutory minimum required in that connection for a public company. Further, the company will also have to enhance its paid up capital to at least Rs. 5 lakhs, if its existing paid up capital was less than the above stated statutory minimum required for a public company. Upon becoming a public company, the word 'private' will be deleted from the name of the company.

3.5.5. Conversion of a Public Company into a Private Company

A public company may be converted into a private company by passing a special resolutions so as to incorporate the four restriction imposed on a private company under section 3(1) (iii) as to membership, transfer of shares, public subscription and acceptance of public deposit. A copy of the special resolution shall be filed with the registrar of companies within 30 days of passing of resolution. The company will also reduce the number of its members in accordance with the legal requirement for a private company, if the exiting number is more than that. After this, sanction of the Central Government must be obtained since proviso of section 31(1) provides that no alternation made in the articles which had the effect of converting a public company into a private company shall have effect unless such alternation has been approved by the central government. If the government approves the change in the articles of association the company becomes a private company from the date of the order of approval. A company of the altered articles together with a copy of the government's letter of approval must be filed with the registrar. After the conversion of the company from public to private it will have to add the word "Private" in its name.

3.6 Other Kinds of Companies

3.6.1 Licenced Companies or Companies not for Profit

Section 25 of the Companies Act, 1956 relates to licenced companies. Such companies are registered under the Companies Act like any other company but before they are registered a licence may be obtained from the Central Government.

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Any association formed for promoting commerce, art, science, charity, religious or any other useful object and which close not intend to apply its profits, if any, for payment of any dividend to its members but instead to apply its income in promoting its objects can obtain a licence from the Central Government and can get itself registered as a company with limited liability. Such companies are allowed to exclude the world 'limited' or 'private' form their names. They are registered without paying any stamp duty on their memorandum and articles of association. Such companies may be public or private companies and may or may not have share capital. In case they have a share capital, they are exempted from complying with the requirement of minimum paid up capital of Rs. 1 lakh for a private company or Rs. 5 lakh for a public company.

It may also be noted that a partnership firm may become a members of such a company. However on dissolution of the firm, its membership will come to an end. [Sec. 25 (4)].

3.6.2 Foreign Company [Section 591]

A foreign company means a company incorporated outside India but having a place of business in India. Therefore, a company which is incorporated outside India and employs agents in India but have no office or does not establish a place of business in India will not be a foreign company. A company shall be said to have a place of business in India if it has a specified or identifiable place at which it carries on business such as an office, godown, storehouse or other premises having some concrete connection between locality and its business. However mere holding a property cannot be said to having a place of business.

It is to be noted that Section 591 defines foreign company in terms of its place of incorporation. If the company is established outside India and has a place of business in India, then only it will be a foreign company under the section. Accordingly, a company incorporated outside India having shareholders who are all Indian citizens and having its business outside India is not covered. On the contrary, or company incorporated in India but having all foreign shareholders shall be a Indian Company and not a foreign company as contemplated under section 591.

It has been held in [P.J. Jonshon v. Astnofiel Armadorn (1989) 3 Comp. LJ 1] that ; "A mere presence of a representative of a foreign company is not sufficient if his only authority is to solicit order from customers but not to make contracts on behalf of the company."

As per the law in the U.S.A., the following activities are not held to constitute "carrying on of business"-

(i) maintaining and defending suit or action or other proceeding or effecting the settlement of any claim in dispute,

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(ii) holding meeting of shareholders or directors.

(iii) effecting sales through independent contractors

(iv) maintaining bank accounts

(v) creating or financing of debts, charges etc. on real or personal property.

(vi) soliciting or procuring order where such orders require acceptance of the company for becoming binding contracts.

(vii) securing or collecting debts or enforcing claims to property of any kind.

(viii) conducting any isolated transactions.

Provisions Relating to Foreign Companies - As per section 592, a foreign company has to furnish the following documents to the registers within 30 days of the establishment of the business in India :

(i) a certified copy of the charter, statute, memorandum and articles of the company containing the constitution of the company. If the instrument is not in English language, a certified translation thereof.

(ii) The full address of registered or principal office of the company.

(iii) A list of directors and secretary of the company giving name in full, usual residential address, nationality of origin, his business and particulars of other directorship held by him.

(iv) The names(s) and address(es) of any person or persons resident in India, authorized to accept service of legal process and notice on behalf of the company.

(v) The full address of the company in India which is to be deemed to be principal place business in India.

When any change occurs in the above particulars, the registrar must be notified accordingly within the prescribed time. [Sec. 593].

The aforesaid documents shall be required to be field at two places, first, with the registrar of the state where the principal place of business is situated and second with the registrar at New Delhi. [Sec. 597].

Other Obligations [Sec. 595]- A foreign company is further bound by the following objections :-

1. The company shall state the country of incorporation in every prospectus inviting subscription, for its shares and debentures, in India.

2. It shall conspicuously exhibit on the outside of every office or place of business, its name and the country of incorporation in English and regional language;

3. It shall give the name of the company and of the country of incorporation

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in English language in all business letters, bill heads and letter papers and in all notice and other official publications of the company;

4. It shall state in every prospectus and in all official publications and exhibit outside every office or place of business, whether the liability of member is limited.

5. Obligation regarding accounts [Sec. 594]- Every foreign company, unless exempted by the Central Government is required to file with the register every year three copies of its Balance Sheet and Profit and Loss Account and other documents required under the Act. Alongwith these documents three copies of list in the prescribed form of all the places of its business in India, shall be sent to Registrar.

6. Obligation regarding Registration of Charges etc [Sec. 600]- The provisions of the section 124 to 145 relating to registration of charges, appointment of receivers etc. will apply to foreign companies, with necessary changes. The provisions of sec. 188 relating to the rights of members and debentures holders to have a copy of the 'trust deed' for securing any issue of debentures of the company will also apply to foreign companies. Further, section 209 shall also be applicable to foreign companies to the extent of requiring them to keep at the principal place of business in India, the book of account with respect to monies received and expended, sales and purchases made, and assets and liabilities in relation to their business in India.

The Companies (Amendment) Act, 1974 has also made certain other section of the Act applicable to foreign companies. There are :

i. The provisionary section 159 relating to the filing of Annual Return with the Registrar shall, subject to such modifications or adoptions as may be made therein by the rules made under this Act, apply to a foreign company.

ii. The provisions of section 209 A (inspection of books of the account, etc), section 233 A (power of Central Government to direct special audit in certain cases), section 233 B (audit of cost accounts in certain cases) and sections 234 to 246 (Powers of registrar to call for information or explanation and investigation of affairs of company by Central Government) shall, so far as maybe, apply only to the Indian business of a foreign company, as they apply to a company incorporated in India.

7. Requirements as to Prospects [Sec. 603 to 608]- A foreign company may issue a prospects offering shares or debentures for subscription even of its has no place of business in India. But, the prospects shall have to comply with the provisions of section 603 to 608 of the act relating to

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prospects. The prosecution of the foreign company has to contain particulars with respect to the following matters also :-

a. the instrument containing or defining the constitution of the company;

b. The provisions of law under which the company was incorporated.

c. An address in India where the above instrument and the enactments or provisions of law may be inspected. If they are not in the English language, the certified English copy should be made available.

d. The date and country of incorporation;

e. Whether the company has an established place of business in India and if so, the address of its principal office in India.

8. Obligations regarding foreign companies in which not less than 50% of the paid – up share capital is in Indian hands – According to section 591 (2), where not less than 50% of the paid up share capital (equity or preference) of a company incorporated outside India, is held by one or more citizens of India or by companies incorporated in India, such other provisions of the Act as may be notified by the Central Government with regard to business carried on by them in India, will become applicable to such foreign companies as they apply to a company incorporated in India.

9. Penalty [Sec. 598]- It any foreign company fails to comply with the provisions applicable to it, the company and every officers or agent of the company who is in default shall be punishable with fine upto Rs. 10,000 and in the cost of a continuing offence, with an additional fine upto 1,000 for every day during which the default countries.

Further, a foreign company which has failed to comply with the requirements applicable to it under the Companies Act, 1956 will be liable to be sued in respect of any contract, dealing or transaction it may have entered into; but shall not be entitled to enforce any contract by way of suit, set off or counterclaim. It cannot also institute any legal proceeding in respect of any such contract until it has complied with all the provisions of the Act relating to foreign companies.

10. Winding up – Where a foreign company, which has been carrying on business in India, ceases to carry on such business in India, it may be wound up as an unregistered company under Part X (Section 582 to 590) of the Companies Act.

A foreign company's business in India can be wound up even in cases where the company has been dissolved or otherwise ceased to exist under

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the laws of the country under which it was incorporated [Sec. 584].

3.6.3 Government Companies

According to section 617, a Government company means any company in which not less than 51% of the paid up share capital is held by :

(i) the Central Government, or

(ii) any State Government or Governments, or

(iii) Partly by the Central Government and partly by one or more State Government.

A Subsidiary of a Government company shall also be treated as the Government Company.

As per the definition given in section 617 a Government Company denotes 'any company' and the term 'company' in the companies act, 1956 means a company as defined in section 3 of the Act, according to which a company is the one formed and registered under the Companies Act, 1956 and any company existing prior thereto. Since the concept of Government company was introduced by the Act of 1956, a Government company shall invariably mean a company registered and incorporated under the Companies Act, 1956 only. A statutory corporation formed under a statue of the legislature like Life Insurance Corporation is not a 'company' under the Companies Act, hence not a Government Company.

Legal Status of a Government Company - Right from the landmark case of Solomon vs. Solomon & Co. Ltd., there are several cases which has established that a company brought into being under the companies Act has a separate existence and the law recognizes a company as a justice person distinct form its members. It has been held in Heavy Engineering Mazdoor Union v. State of Bihar, [1969] 39 Comp. Cas 905 (SC) that the legal status of a Government company is not affected just because the share capital of the company is contributed by the Central Government and all its shares are held by the President of India or the Governor of a State and certain nominated officers of the Government.

Also the observations of justice P.L. Mukherjee In Re River Steam Navigation Company Ltd. [1967] 2 Comp. LJ 106, brings out clearly the legal position of a Government company. According to Justice P.L. Mukherjee –

"Government today is competitor with public / private companies and corporation, and doing trade or business or commerce. In doing so the Government is not doing it qua Government. It joins the field of competition in these diverse spheres and fields as Government Companies, as State Trading Corporations and in many other forms under particular statutes."

A Government company is not a department of the government. In Andhra Pradesh

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State Road Transport Corporation vs. ITO, AIR 1964 SC 1486, the Andhra Pradesh Road Transportation Corporation claimed exemption form taxation by invoking Article 289 of the Constitution of India accruing to which the property and income of the State exempted from the Union of taxation. The SC rejected the corporation's claim and held that trough it was wholly controlled by the State Government, it held a separate equity and its income was not the income of the State Government. To the same effect is the decision in Electronic Corporation of India Ltd. v. Secy. Revenue Deptt., Govt. of A.P. [1999] 97 Comp. Cas. 470.

However, the Supreme Court in Ajay Hasia v. Khalid Muzib, AIR 1981 SC 496 held that a Government company state is for the purposes of Article 12 of the Constitution of India.

The Companies Act is silent on the question whether a Government company incorporated under the Act be private company or public company. As a result, a Government Company may be incorporated either way.

3.6.4 Holding and Subsidiary Companies

'Holding companies and 'subsidiary companies' are relative terms. A company is a holding company of another if the other is its subsidiary.

Section 4 of the Companies Act defines a company to be deemed to be a subsidiary of another, if and only if –

(a) that other company controls the majority Constitution of its board of directors; or

(b) the other company holds mere than half in nominal value of its equity share capital ; or

(c) It is a subsidiary of a third company which itself is a subsidiary of the controlling company for example if company B is a subsidiary of a company A and company C is subsidiary of company B then company C will become subsidiary of company A by virtue of this clause. Similarly, if a company D is subsidiary of company C, then company D shall also be a subsidiary of company B and also of company A.

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Co.A.

Co.B

Co.C

Co.D

Subsidiary of Co. A

Subsidiary of Co. B

Subsidiary of Co. C

Co. C is subsidiary of Co. A also

Co. D is subsidiary of Co. A and Co.B. also

It is important to note here that inorder to call a company "looking company" it must hold the "majority equity capital" or must possess the 'power to appoint majority of directors' with the sole object of controlling the management of another company. If the object is otherwise – either as a security for a loan or in a ficluciary capacity or as pure and simple investment, it is not to be called a holding company.

3.6.5 Investment Companies

An investment company may be defined as "a company whose principal business is the acquisition of share, stock, debentures or other securities" [Sec. 372 (10)].

A company will be an 'investment company' if its principal business consists in acquiring, holding and dealing in share and securities according to its own memorandum. The word 'investment' no doubt suggests only the acquisition and holding of shares and securities and thereby earning income by way of interest, divided etc. But investment companies in actual practice earn their income not only through the acquisition and holding but also by dealing in shares and securities, i.e. by buying with a view to sell later at higher prices and selling with a view to buy later on at lower prices. Normally, a company will be treated as an investment company if the whole or substantially the whole of its business consists in dealings in shares, and securities. If, however, it is also engaged in other business to an appreciable extent, it will not be treated as in Investment Company.

3.6.6 Public Financial Institution [Sec. 4A]

The following institutions shall be regarded, for the purposes of the Companies Act, as public financial institutions, namely:

1. The Industrial Credit & Investment Corporation of India Limited (ICICI)

2. The Industrial Finance Corporation of India Limited (IFCI Ltd.)

3. The Industrial Development Bank of India (IDBI)

4. The Unit Trust of India (UTI)

5. The Life Insurance Corporation of India (LIC)

6. The Infrastructure Development Finance Company Limited

Sub-section (2) of section 4A empowers the Central Government to specify order institutions, as it may think fit, to be a public financial institution by issuing a notification in the Official Gazette. However, no institution shall be so specified unless:-

(i) it has been established or constituted by or under Central Act, or

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(ii) Not less than 51% of the paid-up share capital of such an institution is held or controlled by the Central Government.

The Central Government has inter alia, specified the following institutions to be pubic financial institutions, namely

(1) The Industrial Investment Bank of India (Formerly, IRBI).

(2) The General Insurance Corporation of India (GIC)

(3) The National Insurance Company Limited.

(4) The New India Assurance Company Limited

(5) The Oriental Fire & General Insurance Company Limited

(6) The United Fire & General Insurance Company Limited

(7) The Shipping and Credit & Investment Company Limited (SCICI).

(8) Tourism Finance Corporation of India Ltd. (TFCI).

(9) Risk Capital & Technology Finance Corporation Ltd.

(10) Technology Development & Information Company India Ltd.

(11) Power Finance Corporation Limited.

(12) National Housing Bank (NHB)

(13) Small Industries Development Bank of India (SIDBI)

(14) Rural Electrification Corporation Limited.

(15) Indian Railway Finance Corporation Limited

(16) Industrial Finance Corporation of India Limited

(17) Andhra Pradesh State Finance Corporation

(18) Assam Finance Corporation

(19) Bihar State Financial Corporation

(20) Delhi Financial Corporation

(21) Gujarat State Financial Corporation

(22) Haryana Financial Corporation

(23) Himachal Pradesh Financial Corporation

(24) Jammu & Kashmir State Financial Corporation

(25) Karnataka State Financial Corporation

(26) Kerala Financial Corporation

(27) Madhya Pradesh Financial Corporation

(28) Maharashtra State Financial Corporation

(29) Orissa State Financial Corporation

(30) Punjab Financial Corporation

(31) Rajasthan Financial Corporation

(32) Tamilnadu Industrial Development Corporation Limited.

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(33) Uttar Pradesh Financial Corporation

(34) West Bengal Financial Corporation [Notification No. S.O. 247 (E), dated 28.03.1995].

(35) North Eastern Development Finance Corporation Limited (Notification dated 23.07.1996).

(36) Indian Renewable Energy Development Agency Ltd.

(37) Housing and Urban Development Corpn. Ltd.

(38) Export –Import Bank of India

(39) National Bank for Agriculture and Rural Development (NABARD).

(40) National Co-operative Department Corporation (NCDC) added by Notification No. 581E, dated 09.05.2003

(41) National Dairy Development Board

(42) The Pradeshiya Industrial and Investment Corporation of UP Ltd.

(43) Rajasthan State Industrial Development and Investment Corporation Ltd.

(44) State Industrial Development Corporation of Maharashtra Ltd.

(45) West Bengal Industrial Development Corporation Ltd.

(46) Tamil Nadu Industrial Development Corporation Ltd.

(47) The Punjab State Industrial Development Corporation Ltd. (Notification No. S.O. 1531 (E) dated 25.10.2006].

(48) EDC Ltd. [Notification dated 09.01.2007]

(49) Tamil Nadu Power Finance and Infrastructure Development Corporation Ltd.[Notification No. S.O. 20 (E) dated 09.01.2007].

3.6.7. Producer Companies

Part IX A dealing with Producer Companies has been added to the Companies Act, 1956 by the Companies (Amendment) Act, 2002 and the provisions of this part through this Amendment Act a new class of companies has been created in the Act with special provisions in this regard. This part of the Companies Act, 1956 is unique in character – it provides a self contained set of legal provisions in the matter of Producer Companies and is exclusively devoted to Producer Companies. The necessity to bring in this class of companies under the discipline of Companies Act, thought has not been spelt out in the Part, seems to provide a regulated platform for development of entities engaged in activities that producer company may engage in.

The pattern and consents of the chapters appears to suggest that this Amendment Act in an Act within an Act and most of the distinctive features of the companies Act, 1956 are there. It can further be noted that this Amendment Act has principal focus of multi-State co-operative societies.

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3.6.8 One man company ( or Family Company)

Where one man holds particularly and taxes a few more dummy members (usually family members) to meet the statutory requirement of the minimum number to meet statutory requirement of the minimum number of persons, such a company is known as "one man company". Such a company is perfectly in order in the eyes of law and is regarded to have a separate identity, as distinct from it shareholders. (Solomon v. Solomon & Co. Ltd.) (1897) AC. 22.

3.6.9 Unregistered Companies

Section 582 of the Companies Act, 1956 defines an unregistered company to include any partnership, association or company consisting of more than seven members. The expression shall, however, not include:

(i) A railway company incorporated by any Act of Parliament or other Indian Law or any Act of Parliament of the United Kingdom;

(ii) A company registered under the Companies Act, 1956;

(iii) A company registered under any pervious Companies Laws and not being a company the Registered Office whereof was in Burma, Aden or Pakistan immediately before the separation of the company from India;

(iv) An illegal association as per section 11 of the Companies Act, 1956.

3.7 Summary

The Companies Act provides for a variety of companies that may be promoted and registered under the Act. However, two basis types of companies which may be registered under the Act are 'private' and 'public' companies. These may further be incorporated as limited liability companies or as unlimited liability companies.

A private company [as per Companies (Amendment) Act, 2000] means a company which has a minimum paid-up capital of Rs. 1 lakh or such higher paid-up capital as may be prescribed and which by its articles :

(i) restricts the right to transfer its shares, if any

(ii) prohibits invitations to the public to subscribe for any shares in, or debentures of the company

(iii) limits the total number of members to 50

(iv) prohibits any invitation or acceptance of deposits form person other than its members, director or their relatives.

A pubic company [as per Companies (Amendment) Act, 2000] means a company which :

(a) is not a private company

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(b) has a minimum paid – up capital or Rs. 5 lakh or such higher paid – up capital, as may be prescribed;

(c) is a private company which is a subsidiary of a company which is not a private company.

A company registered under section 25, before or after the commencement of the Companies (Amendment) Act, 2000 shall not be required to fulfill the requirement 'minimum paid –up capital' with respect to private or pubic company, as aforesaid.

A private company enjoys certain privileges and exemptions from the provisions of the Companies Act, for instance, it can be formed with just 2 members; it can commerce business on receipt of certificate of incorporation; it can issue any kind of shares; it is not required to hold a statutory meeting or file a statutory reports; its directors can be advanced loans with the Central Government's a approval and so on.

A private company may become or convert itself into a public company. A private company become a public company if it fails to observe any of the three restrictive provisions of section 3(1)(iii). Likewise, under certain circumstance spelt out under section 43A, a private company may be deemed to be a pubic company. A private company may be converted into public company by passing special resolution and meeting the minimum requirements of a public company like 7 members, 3 directors, etc. Similarly, a public company can also be converted into a private company by passing a special resolution with the approval of the Central Government.

A statutory company is a company created by a special Act of Parliament and is accordingly governed by the statue creating it. However, the provisions of the Companies Act, 1956 apply to them, insofar as the same are not inconsistent with the special Acts under which these companies are formed.

Limited liability companies may limit the liability of their members by the amount unpaid on the shares held by them or by the amount guaranteed or by both.

A company having no limit on the liability of its members is an unlimited company.

Company form of organization is not merely relevant to economic organizations; non – economic organization to promote art, commerce, science, culture, etc. may also be incorporated and registered as companies and with liability of their members limited. In fact, licence may be obtained from the Central Government whereby the company may be freed from using he word 'limited' as part of its name. Even a partnership firm' can become a member of such a company, commonly called 'Association not for profit'.

A Government company is one in which either the Central Government or the State Government or both the Central and State Governments taken together hold not less

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than 51% of its paid-up capital. The terms further includes a subsidiary of such a Government company. A Government company may be incorporated as a private Government company. A Government company may be incorporated as a private company or a pubic company. A Government company is governed by the provisions of the Companies Act unless exempted by the Central Government under powers conferred under section 620. The Central Government has exempted the Government companies from most of the provisions of the Companies Act.

A foreign company means a company incorporated outside India but having a place of business in India. A foreign company is required to furnish to the Registrar documents specified in the section 592. Besides, it is subjected to certain obligation spelt out under section 594, 595, 600, 603-608. Where foreign companies in which more than 50% of the paid-up share capital is in Indian hands, section 591 (2) provides that it should be, for its ceases to carry on business in India, may be wound up as n unregistered company. Even where foreign company is a Government company, it may be wound up in India.

'Holding' and 'Subsidiary' companies are relative terms. A company shall be holding company of another where (a) its controls the composition of its board of directors; or (b) holds more than half in nominal value of its equity share capita; or (c) its is subsidiary of its subsidiary.

Investment company' has been defined as a company whose principal business is the acquisition of shares, stock, debentures or other securities.

Certain institutions have been specified as 'public financial institutions' under section 4A. Central Government has been further empowered to notify nay other institutional as a public financial institution provided it has been constituted under any Central Act or not less than 51% of its paid-up share capital is held or controlled by the Central Government. Fourteen such institutions have been identified by the Central Government.

3.8 Test Your Knowledge

1. Define a 'private company'. What privileges and exemptions are granted to private company.

2. Differentiate between a private and a pubic company. When does a private company become a public company.

3. Write short notes on

(i) Government company (ii) Foreign Company (iii) Holding and Subsidiary Company (iv) Section 25 Companies (v) Producer Companies

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Unit-4 : Formation and Incorporation of a Company

STRUCTURE

4.0 Introduction

4.1 Objectives

4.2 Promotion - What is?

4.3 Promoter

4.3.1 Legal Position

4.3.2 Liability

4.3.3 Remuneration

4.4 Pre-incorporation Contests

4.5 Incorporation or registration of a company

4.6 Certificate of incorporation.

4.7 Capital subscription or floatation

4.8 Commencement of business

4.9 Summary

4.10 Check your progress

4.0 Introduction

The very step in the formation of a company is to contemplate some

business idea and then to take subsequent steps like arranging funds, property,

manpower etc. to transform that idea into a reality. The person or person who

assume the task of this nature are called as promoters and the task is known as

‘promotion’.

In this unit the emphasis will be on analysing the various stages in the

formation of a company, public or private, and also the legal position and liability

of a promoter to the company and to the third parties.

One of the areas of importance is the nature of pre-incorporation contracts

entered into by the promoters prior to the incorporation of the company with the

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third parties. How far company is responsible to such contracts as “two consenting

parties are necessary to a contract, whereas the company before its incorporation is

a non-entity (Kelner V. Baxter).” We will discuss the legal status of pre-

incorporation contracts prior to and after the enactment of specific relief Act, 1963.

4.1 Objectives

The basic purpose of this Unit is to make the students understand the

preliminary steps to be taken by anyone desirous of transforming his business idea

into a real enterprise. After going through this Unit, you will be able to :-

Understand the concept of ‘Promotion’ of a company.

Know the legal status and liabilities of promoter of a company.

Learn the enforceability of pre-incorporation contracts.

Learn the various stages of formation of a company.

4.2 Promotion - What is ?

Promotion is a term of wide import denoting the preliminary steps taken for

the purpose of registration and floatation of the company. The whole process of

formation of a company is very lengthy and may be divided into four stages namely

:

1. Promotion

2. Incorporation

3. Capital Subscription or floatation

4. Commencement of business

Of these stages only the first two are necessary for the formation of a private

company, and of a public company not having any share capital. They may

commence business immediately after they have received a certificate of

incorporation. But a public company having a share capital has to go through all the

four states mentioned above before it can commence business.

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The “promotion” is the first stage in the formation of a company. It may be

defined as "the discovery of business opportunities and the subsequent organization

of funds, property and managerial ability into a business concern for the purpose of

making profits therefrom [C.W. Gerstenberg, Financial Organisation and

Management of Business].

Thus, promotion begins when someone discovers on idea regarding some

business which can be profitably undertaken by a company and includes

preliminary and detailed investigation of the feasibility of the idea, assembling of

business elements and making provision of the funds necessary to launch the

enterprise as a going concern. The person who assume the task of promotion are

called promoters. A promoter may be an individual, syndicate, association, partner

or a company.

4.3 Promoter

The expression “promoter” has not been defined under the companies Act,

although the term is used expressly in sections 62, 69, 76, 478 and 519. Even in

English law there is no general statutory definition of a “promoter”. Section 62(b)

(a) gives a restrictive definition of promoter for a limited purpose only, as : a

promoter who was a party to the preparation of the prospectus or of a portion there

of containing the untrue statement, but does not include any person by reason of his

acting in a professional capacity in procuring the formation of the company.

Cockburn CJ., in Twycross V. Grant [1877]2 C.P.D. 469 C.A. described a promoter

as “One who undertakes to from a company with reference to a given project, and

to set it going, and who takes the necessary steps to accomplish that purpose”.

Another definition is given by Bown L. J., in Whaley Bridge Printing Co. V.

Green [1880] 5 B.D. 109 - “The term promoter is a term not of law but of

business”. It means “a number of business operations familiar to the commercial

world by which a company is brought into existence”.

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In U.S.A. the Securities Exchange Commission Rule 405(a) defines a

promoter as a person who, acting alone or in conjunction with other persons

directly or indirectly takes the initiative in founding or organizing the business

enterprise.

It is important to note that to be a promoter it is not necessary that the person

should be associated with the initial formation of the company. Any person who

subsequently helps to arrange floating of its capital will equally be regarded as a

promoter. [Lagunas Nitrate Co. V. Lagunas syndicate (1899)2 Ch. 392].

However, section 626 of the companies Act makes it clear that person

assisting the promoter by acting in a professional capacity, eg. Counsels, solicitors,

accountants and other experts, do not thereby become promoters themselves. But

when, he goes further than this i.e., by introducing this clients to a person who may

be interested in purchasing shares in the proposed company, he would be regarded

as a promoter.

In India, the promoters are usually persons who, informing the company,

secure for themselves the management of the company being formed or are persons

who convert their own private business into a limited company, public or private

and secure for themselves more or less a controlling interest into the company’s

management. [A. Ramaiya, Guide to the Companies Act, 12th Edn. P. 351).

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4.3.1 Legal Position

Though it is difficult to accurately define a promoter, but his legal position is

quite certain. The promoters enjoys wide powers relating to the formation of a

company, but, as far as his legal position is concerned, he is neither an agent nor a

trustee of the proposed company, as these is neither a principal nor a trust in

existence at the time of his effort. But it does not mean that the promoter does not

have any legal relationship with the proposed company. He stands in a fiduciary

position towards the company about to be formed. Lord Cairns in Erlanger V. New

Sombrero phosphate Co. 39 LT 269, has so stated the position of a promoter - “the

promoters of a company stand undoubtedly in a fiduciary position. They have in

their hand the creation and moulding of the company. They have the power of

defining how and when and in what shape and under whose supervision it shall

come into existence and begins to act as a trading corporation.

Lord Justice Lindley in Lidney Wigpool Iron Ore Co. V. Bird [1866] 33 Ch.

D. 85 thus describes the potions of a promoter -

“Although not an agent for the company, nor a trustee for it before its

formation, the old familiar principles of law of agency and of trusteeship have been

extended and very properly extended to meet such cases. It is perfectly well settled

that a promoter of a company is accountable to it for all monies secretly obtained

by him from it just as the relationship of principal and agent or the trustee and

cestui que trust had really existed between him and the company when the money

was obtained.

4.3.2 Liability

Following are the liabilities of a promoter under the various provisions of

the companies Act :-

(1) Section 56 and Schedule II lays down matters to be stated and reports to be

set out in a prospectus. A promoter may be held liable for non-compliance of

the provisions as stated in the section and the schedule.

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(2) Section 62 and 63 provides for the liability of promoters for any untrue

statement in the prospectus to a person who subscribes for shares or

debentures on the faith of such prospectus. The liability of the promoter in

such a case shall be only towards original allottee of shares and would not

extend to the subsequent allottees. The remedies against the promoter may

include :-

(a) The rescission of the contact to purchase charges,

(b) Suit for damages,

(c) Prosecution that may led to imprisonment for a term upto two years or

fine upto Rs. 50,000, or both.

(3) Section 203 provides the power to the court to suspend a promoter from

taking part in the management of the company for a period of five years if:-

(a) he is convicted of an offence in connection with the promotion,

formation or the management of a company, or

(b) it appears during liquidation that -

(i) he has been guilty of any offence for which he is punishable under

section 542, or

(ii) he while being an officer of the company has otherwise been guilty

of any fraud or misfeasance in relation to the company or of any breach

of his duty to the company.

(4) According to section 478, a promoter may be liable to public examination

like any other director or officer of the company if the court so directs on a

liquidator’s report alleging fraud in the promotion or formation of the

company.

(5) A company may also proceed against a promoter on action for deceit or

breach of duty under section 543, where the promoter has misapplied or

retained any property of the company or is guilty of misfeasance or breach

of trust in relation to the company.

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(6) Where these is more than one promoter, they are jointly and severally liable

and if one of the co-promoters is sued and damages are rewired from him, he

can claim contribution from the other co-promoters. In case of the death of a

promoter his estate remains liable, and upon the insolvency of a promoter

the company is entitled to prove its claim in the insolvency proceedings.

4.3.3 Remuneration

The remuneration to a promoter -in consideration of his services in the

formation of the company, may be paid in cash or partly in cash and partly in

shares and debentures of the company. But, a promoter is entitled to recover any

remuneration for his services from the company if there is a valid contract, between

him and the company enabling him to do so. Without such a contract, he is not even

entitled to recover his preliminary expenses or the registration fees. In practice,

however, recovery of preliminary expenses and registration fees does not normally

present any difficulty as the articles generally contain a provision authorising the

directors to pay them [Touche V. Metropolitan Railway Warehousing Company

(1871) L.R. 6Ch. 671].

The provision in the articles does not impose any legal obligation on the

company towards the promoters but as they or their nominees will usually be the

first directors of the company, the power is generally exercised in their favour.

In practice, a promoter is remunerated in any of the following ways :-

(a) He may take commission on the shares sold.

(b) He may be paid a lump sum by the company.

(c) He may sell his own property to the company for cash or against fully

paid shares in the company at an overvaluation after making full

disclosure to an independent board of directors or to the intended share

holders.

Any Remuneration or benefit given to the promoters must be disclosed in

the prospectus.

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4.4 Pre-incorporation Contracts

Sometimes the promoters enter into contracts to acquire some property or

right of the company before its incorporation. Such contracts are called “pre-

incorporation” contracts or “preliminary” contracts. But no contract can bind a

company before it becomes capable of contracting by incorporation. It was held in

Kelner V. Baxter |(1866) 15 LT 213, that, "two consenting parties are necessary to

a contract, whereas the company before its incorporation is a non-entity”.

The legal status of pre-incorporation contracts may be discussed under the

following two heads :-

(1) Position before 1963 (i.e. before passing of Specific Relief Act,1963), and

(2) Position after 1963 (i.e. after passing of Specific Relief Act, 1963).

Position before 1963

Prior to 1963, a pre-incorporation contact never binds a company since a

person whether legal or juristic, cannot contract before his or its existence and a

company has no legal existence prior to its incorporation. Even the company cannot

ratify the contract as the principal did not exist at the time the contract was made.

The promoters will continue to be personally liable for pre-incorporation contacts

unless a new contract embodying the terms of the old one is made afresh by the

company after its incorporation. Natal Land & Colonisation co. Ltd. V. Pauline

Colliery Syndicate Ltd. (1904) A.C. 120; is an illustration on the point. In this case

the Natal Co. Contracted with ‘A’, the nominee of the syndicate (which was not

even incorporated) to grant a lease of certain coal mining rights for three years.

After the registration of the Syndicate, it claimed the contracted lease which the ‘N’

Company refused. In a suit for specific performance it was held that the syndicate

was not entitled to its claim as it was not in existence when the contract was made

and a company cannot obtain the benefit of a pre-incorporation contract unless a

new contract is made with the company after its incorporation.

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Position since 1963 (i.e after passing of the specific relief Act, 1963). In

India, until the passing of the specific relief Act, 1963, the promoters found it very

difficult to carryout the work of incorporation. Since the contracts prior to

incorporation were void and also could not be ratified, people are not keen in

supplying any goods or services for the promotion of a company. Promoter also

does not want to take any personal responsibility. The Specific Relief Act, 1963 has

provided certain relief to the promoters. Section 15(h) of the Specific Relief Act,

1963 provides that where the promoters of a public company have made a contract

before its incorporation for the purpose of the company, and if the contact is

warranted by the terms of its incorporation, the company may enforce it.

“Warranted by the terms of incorporation” means that the contract is within the

scope of the company's objects as stated in the memorandum.

It is not only the company which is allowed, under the Specific Relief Act,

to adopt and enforce its pre-incorporation contracts against the third parties, section

19 of the Specific Relief Act also allows the other party to enforce the contract

against the company if -

(i) The company had adopted the same after incorporation, and

(ii) The contract is warranted by the terms of incorporation.

4.5 Incorporation or Registration of a Company

Incorporation of a company is the second stage in the formation of a

company. It is effected by registration with the Registrar of Companies. According

to section 12 any seven or more persons or where the company to be formed will be

a private company, any two or more persons, associated for any lawful purpose

may, by subscribing their names to a memorandum of association and otherwise

complying with the requirements of this Act in respect of registration, form an

incorporated company, with or without limited liability.

Important steps to be followed for incorporation of a company are :

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1. Type of company to be formed :- The first thing to be decided by the

promoters is the type of the company to be floated. Companies Act provides

for registration of only two types of companies viz. public and private

companies.

2. Check availability of name :- According to section 20, the name of the

company should not be such as in the opinion of Central Government is

undesirable. After selecting a name which is available and not undesirable,

the promoters of the company are required to file an application for

registration in form No. 1A, to the registers of the companies of the state in

which the registered office of the proposed company is to situate.

Three names should be submitted to the Registrar, in order of priority, to

afford same flexibility. The Registrar of Companies shall furnish the

information regarding availability of name within seven days of the receipt

of the application. After the information by the register, the promoter should

adopt the name within a period of six months from the date of intimation by

the Registrar. This period may be extended by the Registrar.

Corporate Identity Number (CIN) :- Registrar of the companies shall allot

a Corporate Identity Number to each company registered on or after

November 1,2000 -vide circulate No. 12/2000 dated 25-10-2000.

3. Preparation of memorandum and articles of association:- Two very

important documents of a company are its memorandum and articles of

association. The memorandum of association is the constitution of a

company. It is a document which defines object of the incorporation, the

area within which the company can act, the capital which it shall be allowed

to raise, the nature of liability of its members, the name of the state where

the registered office of the company shall be located etc.

The articles of association contains the rules and regulations relating to the

internal management of the company. Draft of memorandum and articles of

association should be prepared and typed, and the same shall be printed as

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required by section 15 after the vetting by the registrar/regional director.

Section 15 also requires that every memorandum should be signed by each

subscribes who should add his address, description and occupation, if any, in

the presence of at least one witness, who shall attest the signature and shall

also add his address, description and occupation. The subscribers to the

memorandum should also state clearly the number and nature of shares

subscribed by them. It is to be noted that the subscribers have to subscribe

the shares directly-accepting a transfer from any other subscriber etc., shall

not be valid.

If the executants to the memorandum is an illiterate, the subscriber should

put his thumb impression or mark which should be described as such by the

subscriber or person writing for him. The latter should also place the name

of the executants against or below the mark and authenticate it by his own

signature. He should also write against the name of the subscriber, the

number of shares taken by him. Such person should also read and explain

the contents of the document to the executant and make an endorsement to

that effect on the document.

The articles of association should also be signed by these subscribers to the

memorandum and their signatures should also be attested by a witness. The

memorandum and articles have to be stamped according to the Stamp Act

applicable to the state where the company is incorporated.

4. Preparation of other documents :- Apart from the memorandum and articles

of association, the promoters have also to prepare the following

documents :-

(i) Consent of the directors - according to section 266; in the case of a

public limited company having a share capital, a written consent of the

directors to act in that capacity, duly signed by each director, alongwith

a written undertaking by them to take the necessary qualification

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shares, if any, as provided by the articles is required to be submitted.

This document is, however, not to be filed in the case of :-

(a) A company without share capital

(b) A private company, and

(c) A company which was a private company prior to its becoming a

public company.

(ii) The particulars of director :- The particulars of the persons who are

named in the articles to act as director, manager, secretary etc. must be

filed in duplicate with the Registrar of the Companies.

(iii) Statutory declaration:- Section 33(2) requires the filing of a statutory

declaration, known as “Statutory Declaration of Compliance”, stating

that all the legal requirements of the Act prior to incorporation have

been complied with. Such a declaration must be signed by either an

advocate of the Supreme court or of a High Court, or by an attorney or

a pleader entitled to appear before a High Court, or by a Company

Secretary or a Chartered Accountant in whole time practice in India,

who is engaged in the formation of the company or by a person named

in the articles as a director, manager or secretary of the company.

Along with the above documents necessary filing fees and registration

fees at the prescribed rates are also to be paid. Schedule X, given at the

end of the companies Act, prescribe the rate of filing fees and

registration fees.

4.6 Certificate of Incorporation

The Registrar, after scrutinizing these documents and finding them in order,

will register the company and issue a certificate of incorporation'. On obtaining this

certificate the company becomes a body corporate, with perpetual succession and a

common seal. [Sec. 34(2)].

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Conclusiveness the Certificate of Incorporation

According to section 35 of the Act, the certificate of incorporation give by

the Registrar shall be conclusive evidence that all the requirements of the Act have

been complied with and that the company has been duly registered. In other words,

once a certificate of incorporation has been granted no one can question the

regularity of incorporation. In the famous Peel’s case [(1867) 2Ch. APP. 674]. It

has been observed by Lord Cairns that - “if memorandum is found to be materially

altered after signature but before registration. When once the certificate of

incorporation is given nothing is to be inquired into as to the regularity of the prior

proceedings”. Also if the memorandum is signed by only one person for all the

seven subscribers or the signatories be all infants, the certificate would be

nevertheless conclusive and would not affect the status and existence of the

company as a legal person although such irregularities might give rise to claims

between the subscribers. The case under consideration is Moosa V. Ibrahim ILR

191340 Col. 1 (PC), - the memorandum of association of a company was signed by

two adults and by a guardian of other five members, who were minors. The

Registrar, however, issued the certificate of incorporation after registering the

company. The count held the certificate to be conclusive for all purposes. The

certificate prevents any one from alleging the company does not exist. To the same

effect is the decision in Jubilee Cotton Mills Ltd. V. Lewis [1924] A.C 1958, In this

case the registrar issued a certificate of incorporation on January 8, but dated it

January 6, which was the date of receipt of documents by him. On January 6, the

Company made an allotment of shares to Lewis. The court held that the certificate

was conclusive evidence of incorporation on January 6 and that the allotment was

not void on the ground that it was made before the company was incorporated.

However, if a company has been incorporated with illegal objects, the illegal

objects would not become legal by the issue of the certificate. If a company with

illegal objects happens to be registered, the effect will be that while the existence of

certificate precludes its corporate status from being questioned, the company is

forbidden to carry on any business in furtherance of its illegal objects. The legal

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personality of the company cannot be extinguished by cancellation of the certificate

of incorporation [Bowman. V. Secular Society Limited, (1917) A.C. 406]. The

remedy in such a case would be to 'wind up' the company.

4.7 Capital Subscription or Floatation

As already discussed, a private company is prohibited from inviting

subscription to its share capital by public. Thus, when a private company is formed

the necessary capital is obtained from friends and relatives by private arrangement.

Also, a private company or a public company not having share capital can

commence business immediately on its incorporation. Therefore, the ‘capital

subscription stage’ and the ‘commencement of business stage’ are relevant only in

case of a public company having a share capital. When a public company has been

registered and has received its certificate of incorporation, it is ready for floatation,

or, in other words, it can go ahead with raising capital sufficient to commence

business. In the case of a public company also, the promoters may not invite public

to subscribe to its share capital and may arrange the capital privately as in the case

of a private company.

According to section 70, every public company has to take either of the

following steps :-

(i) issue a prospectus is case public is to be invited to subscribe to its

capital, or

(ii) deliver a statement in lieu of prospectus where the company has either

not issued a prospectus or though it has issued a prospectus it has not

proceeded to allot any of the shares offered to the public for

subscription.

Where prospectus has been issued inviting subscription to the shares, the

company cannot proceed to allot shares unless the amount stated in the prospectus

as minimum subscription has been subscribed and the money payable on

application in respect of such shares has been received by the company on the

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closure of the issue, in case the issue is not underwritten or within 60 days of

closing of the subscription list, where the issue is underwritten (SEBI guidelines,

2000). The minimum subscription as per schedule II and SEBI guidelines has to be

90% of the entire issue. In case the minimum subscription is not received, the

company has to refund forthwith the entire amount received with application. In

case the application money is not returned within next 8 days (within 10 days, as

per section 69), the company and the directors shall be liable to return the same

with interest at the rate of 15% per annum (at the rate of 6% as per section 69).

Note: SEBI guidelines with respect to public issues will be discussed in detail in a

subsequent chapter on Shares.

4.8 Commencement of Business

As discussed earlier, a private company or a public company having share

capital may commence business immediately after its incorporation. But a public

company having share capital must obtain certificate to commence business .from

the Registrar of Companies before commencing its business or exercising any

borrowing powers. The previsions of section 149 of the Companies Act must be

complied with in order to obtain certificate of commencement of business.

Provision of section 149(1) applies in case company has issued a prospectus, and

provision of section 149(2) becomes applicable when the company has not issued a

prospectus.

Where the company has issued a prospectus :-

Section 149 (1) provides that a public company, having a share capital and

issuing a prospectus inviting the public to subscribe for its shares, will have to file

the following documents with the registrar to obtain the certificate of

commencement of business :-

(a) The declaration that shares payable in cash have been allotted upto the

amount of the minimum subscription as stated in the prospectus,

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(b) The declaration that every director has paid in cash the application and

allotment money on his shares in the same proportion as others.

(c) The declaration that no money is liable to become refundable to the

applicant by reason of failure to apply for or to obtain permission for

the shares or debentures to be dealt in on any recognised stock

exchange;

(d) The statutory declaration in the prescribed form (Form No. 19) by one

of the directors or the secretary or, where the company has not

appointed a secretary, a secretary in whole time - time practice that

the above requirements as stated in classes (a), (b) and (c) mentioned

above, have been complied with..

Where the company has not issued or prospectus :-

According to the provision of section 149(2), a public company, having a

share capital, but not issuing prospectus has to file the following documents with

the register before commencing any business or exercising any borrowing power:-

(a) a statement in lieu of prospectus;

(b) a declaration that every director has paid in cash the application and

allotment money on his shares in the same proportion as others;

(c) a statutory declaration in the prescribed form (Form No. 20) that clause

(b) as stated above, has been complied with and duly verified by one of

the directors or the secretary or, where the company has not appointed

a secretary, a secretary in the whole time public.

The Registrar, after scrutinizing these documents, if satisfied that the

company has duly complied with the aforesaid conditions, shall issue a certificate

certifying that the company is entitled to commence business. It is after getting this

‘Trading Certificate’ that the process of the formation of public company having

share capital is complete and it is now that such a company can start its business

and exercise its borrowing powers. Any contract made by the company before

securing this certificate is provisional only and shall not be binding on the company

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till such certificate has been obtained [Sec. 149(4)]. If the company does not

commence its business within a year of its incorporation, it may be wound up by

the court [Sec. 433(c)].

The certificate to commence business entitles the company to commence

business given in the main object clause of the memorandum of association. No

business given in the 'other object clause' can be commenced without obtaining

prior approval of the shareholders by way of special resolution. However, the

Central Government may allow a company to commence business in the ‘other

object clause’, even after an ordinary resolution is passed by the company in

general meeting, provided the application to that effect has been made by the board

of directors.

Penalty :-

If any public company having share capital commences its business or

exercises borrowing powers without obtaining certificate to commence business,

then every person at fault shall be liable to fine which may extend to Rs. 5000

[Substituted for “Rs. 500” by the companies (Amendment) Act, 2000], for every

day of default. [Sec. 149(6)].

4.9 Summary

The whole process of formation of a company may be divided into four

stages: namely, (i) promotion, (ii) registration, (iii) floatation, and (iv)

commencement of business.

Promotion denotes preliminary steps taken for the purpose of registration

and floatation of the company. The persons who undertake these steps are called

promoters. However, the persons assisting the promoters by acting in a professional

capacity do not thereby become promoters themselves. The status of a promoter is

generally terminated when the Board of Directors has been formed and they start

governing the company.

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The Companies Act, 1956 contains no provisions regarding the duties of

promoters, it merely imposes liability on promoters for untrue statements in

prospectus, they are parties to, and for fraudulent trading. The Courts have,

however, charged them with two fiduciary duties, namely, (i) not to make any

secret profit out of promotion; and (ii) to disclose to the company any interest

which he has in a transaction entered into by it. The duties of a promoter do not

come to an end on the incorporation of the company, or even when Board of

Directors is appointed. They continue until the company has acquired the property

or business which it was formed to manage and has raised its initial share capital.

A promoter is not entitled to recover any remuneration for his services from

the company unless there is a valid contract, enabling him to do so, between him

and the company. Alternatively, articles may authorise the directors to pay them.

A pre-incorporation contract is void ab initio unless the company adopts the

same procedure after incorporation and the contract is warranted by the terms of

incorporation.

Before proceeding to register a company, the promoters have to decide the

type of company to be floated, make application for availability of name, prepare

memorandum and articles of association and get the same vetted, printed, stamped

and signed, prepare other necessary documents. After the said documents are ready,

the same should be filed with R.O.C. along with filing fee.

After scrutinising the documents and on being satisfied that they are in

order, the R.O.C. issues the certificate of incorporation. The certificate of

incorporation is conclusive as to all the requirements of the Act with respect to

registration and matters precedent and incidental thereto having been duly complied

with.

A private company can commence its business on receipt of certificate of

incorporation but a public company must obtain another certificate, viz., certificate

to commence business. Before it actually gets the certificate to commence business,

it may have to enter into a number of contracts. Such contracts are called

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‘provisional contracts’. These contracts become binding, without any need for

ratification, on company becoming entitled to commence business.

The stage after incorporation and before commencement of business is

called the Stage of floatation. Under this stage, a-company is to raise the necessary

capital. To get the certificate to commence business, it must have received the

minimum subscription (viz, 90% of the entire issue). In fact, if minimum

subscription is not received, the entire money which remains in a separate bank

account, must be repaid forthwith. In case it is not returned within next. 8 days, the

company and the directors shall be liable to return the same with interest @ 15%

p.a.

On complying with the requirements of section 149, the R.O.C. grants the

company the certificate to commence business. Now, a public company can

commence its business.

4.10 Check Your Progress

1. Who is a promoter of a company? Discuss his legal status in relation to

the company he promotes.

2. Before a company is actually incorporated, the promoters of the company

enter into contracts on behalf of the company. Can such contracts be

enforced by or against the company after its incorporation?

3. Distinguish between ‘certificate of incorporation’ and certificate of

commencement of business.

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