Features of Company

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A Company is a voluntary association of persons formed for the purpose of doing business, having a distinct name and limited liability. They can be incorporated under the Companies Act (it may be any type of company) A company implies a voluntary association of persons who provide money to run its business and incorporate themselves into a distinct legal entity.

2

A company is an artificial person created by law, having separate entity, with a perpetual succession and common seal A company is an association of many persons who contribute money or monies worth to a common stock and employ 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 albeit the right to transfer is often more or less restricted.3

CHARACTERISTICS OF A COMPANYThe above definitions bring out the following distinct features of a company, which together make it a unique association and explain its nature. 1. Independent Legal Entity 2. Limited Liability 3. Everlasting Existence 4. Separate Property 5. Flexibility of Investment 6. Common Seal 7. Capacity to Sue and being Sued 8. Separation of Ownership and Management 9. Proportionate Representation 4 10.Right to Own Property Contd.

.CHARACTERISTICS OF ACOMPANY1. Independent Legal Entity . Afterbeing incorporated under the Act a company becomes an independent legal entity, with an existence separate from its members. It has its own name and seal, its assets and liabilities are separate and distinct from those of its members. It is capable of owning property, incurring debt, borrowing money, having a bank account, employing people, and suing and being sued separately. In Salomon vs Salomon & Co. Ltd., Contd.

.CHARACTERISTICS OF ACOMPANY2. Limited Liability. The liability of the members of a company is limited up to the face value of the shares held by them. A member is liable to pay only the uncalled money due on the shares held by him/her. In contrast, partners of a firm have unlimited liability i.e., if the assets of the firm are not adequate to pay the liabilities of the firm, the creditors can force the partners to make good the deficit from their personal assets. Contd

.CHARACTERISTICS OF A COMPANY3. EverlastingA company does not die or cease to exist unless it is specifically wound up or the task for which it was formed has been completed. Membership of a company may keep on changing from time to time but that does not affect the life of the company. Death or insolvency of members does not have an effect on the subsistence of a company. Contd..7

Existence:

.CHARACTERISTICS OF ACOMPANY4. Separate Property . A company is a distinct legal entity. The companys property is its own. A shareholder cannot claim to be the owner of the company's property during the existence of the company. The Supreme Court of India has held that a shareholder is not the part owner of the company or its property; he is only given certain rights by law, for example, to vote or attend meetings, or to receive dividends. Contd

.CHARACTERISTICS OF ACOMPANY5. Flexibility of Investment . Shares in a company are freely transferable. When a shareholder transfers his shares to another person, the transferee steps into the shoes of the transferor and acquires all the rights of the transferor in respect of those shares. However, private companies can restrict their members right to transfer shares. Contd.

.CHARACTERISTICS OF ACOMPANY6. Common Seal. A company, though a juristic

person, does not have a physical presence. Therefore, it acts through its Board of directors for carrying out its activities and entering into various agreements. Such contracts must be under the seal of the company. The common seal is a seal used by a company as the symbol of its incorporation and acts as the official signature of the company. Any document not bearing the common seal may not be accepted as authentic and hence may not have any legal force.Contd.

.CHARACTERISTICS OF ACOMPANY7. Capacity to Sue and being Sued. A company can sue or be sued in its own name as distinct from its members. Similarly, a company has every right to enter into contractual obligations with other parties. However, the Supreme Court of India has held in the case of State Trading Corporation of India vs CTO that a company cannot have a status of a citizen under the Constitution of India. Contd

.CHARACTERISTICS OF ACOMPANY8. Separation of Ownership and Management . A company is administered and managed by its managerial personnel i.e., the Board of directors. The shareholders are simply the holders of the shares in the company and need not necessarily be the managers of the company. Contd

.CHARACTERISTICS OF ACOMPANY9. Proportionate Representation . Proportional representation implies one share - one vote i.e., if a person has 10 shares, he has 10 votes in the company. This is in direct contrast to the voting principle of a co-operative society where the one member - one vote principle applies. Contd

.CHARACTERISTICSOF A COMPANY10. Right to Own Property . Company is a distinct legal entity and can own, transfer and manage property in its own way. The companys property is its personal. A member cannot claim to be owner of the companys property not only during the existence of the company, in the event of its being wound-up too. Contd14

Differences Between Company and PartnershipS. No.1.

Partnership

Company

A partnership is governed by A company gets governed by the the Indian Partnership Act. Companies Act.

2.

It is not a distinct legal entity.

It

enjoys

a

separate

legal

existence independent of its members. Contd.

..Differences Between Company and Partnership

3.

Registration is not obligatory in Registration is obligatory. case of partnership.

4.

Liability unlimited.

of

the

partners

is The liability of shareholders of a limited company is limited.

Contd.

..Differences Between Company and Partnership5. Property of the firm belongs to the In case of a company, the

partners and they are collectively property belongs to the company entitled to it. and not to its members.

6.

A

partner in

cannot the

transfer

his In a company, shares may be firm transferred without the

interest

partnership

without the consent of all other permissionpartners.

of

other

members

unless contrary provisions exist in the articles of the company.

Contd.

Differences Between Company and Partnership7. In case of partnership the number of A public company may have as many members must not exceed ten in case members as it desires. A private company of banking business and twenty other businesses. in cannot have more than fifty members.

8.

There must be at least two members The in order to form a partnership firm.

minimum

number

of

members

necessary for a public limited company is seven and two for a private limited

company. 9. In case of a partnership, cent per cent In case of a company, decision of the consent is required for any decision. majority members/ shareholders prevails.

TYPES OF COMPANIESCompanies may be classified into the following categories: Public and Private companies Limited and Unlimited companies Section 25 companies Parent and Subsidiary companies Government companies Foreign companies Contd.

.Types of Companies1. Public Company . A public limited

company is a company limited by shares in which there is no restriction on the maximum number of members, as well as on the transfer of shares and acceptance of public deposits. The liability of each member is limited to the extent of the unpaid amount of the face value of the shares and the premium thereon in respect of the shares held by a member. The minimum number of members is seven. Contd

.Types of Companies2. Private Company. A private company means a company which has a minimum paid up capital of Rs one lakh or such higher paid-up capital as may be prescribed and by its articles such as the following: a. restricts the right to transfer its shares, if any; b. limits the number of its members to 50, including: i. persons who are in the employment of the company, and ii. persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after their employment ceased; and 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 than its members, directors or their relatives. Contd.

Privileges and Exemptions of a Private Limited Company1. Minimum number of its members is two. 2. Prohibition of allotment of the shares or debentures in certain cases unless statement in lieu of prospectus has been delivered to the Registrar of Companies does not apply. 3. A special resolution to issue shares to nonmembers is not required in case of a private company. Restriction contained in Section 81 related to the rights issue of share capital does not apply. 4. A private company does not need a separate certificate of commencement of business. Restriction contained in Section 149 on commencement of business by a company does not apply. Cont.

Privileges and Exemptions of a Private Limited Company1. Provisions of Section 165 relating to statutory meeting and submission of statutory report do not apply. 2. One (if seven or less members are present) or two members (if more than seven members are present) present in person at a meeting of the company can demand a poll. 3. In case of a private company which is not a subsidiary of a public limited company, or in the case of a private company whose entire paid up share capital is held by one or more corporate bodies, incorporated outside India, no person other than the member of the company concerned shall be entitled to inspect or obtain the copies of profit and loss account of that company. 4. Minimum number of directors is only two (three in case of a public company.

Private companies deemed to be public limited co.A private company will be treated as a public limited company in any of the following circumstances: 1. Where at least 25 per cent of the paid up share capital of a private company is held by one or more bodies corporate, the private company shall automatically become a public company on and from the date on which the aforesaid percentage is so held. 2. Where the annual average turnover of the private company during the period of three consecutive financial years exceeds Rs 25 crores, the private company shall be, irrespective of its paid up share capital, become a deemed public company. Cont.

Private companies deemed to be public limited co. 3. Where not less than 25 per cent of the paid up capital of a public company limited is held by the private company, the private company shall become a public company from the date on which the aforesaid percentage is so held. 4. Where a private company accepts deposits after the invitation is made by advertisement or renews deposits from the public (other than from its members or directors or their relatives), such companies shall become public company on and from the date, such acceptance or renewal is first made.

Conversion of a Private Company into Public CompanyThe conversion of a private company into a public company may be discussed under the following two heads: Conversion by default Conversion by choice Conversion by default (Section 43) . If a company commits a default in compliance with the essential requirements of a private company as laid down in Section 3 (1) (iii) of the Act i.e., it does not restrict transfer of shares by its members; its membership exceeds 50; or gives invitation to public to buy shares or debentures or to make deposits; the company ceases to be entitled to the privileges and exemptions conferred on private companies by or under this Act. Under these circumstances, the Act shall apply to the company as if it were a public and not a private company. However, National Company Law Tribunal (NCLT ) may grant relief from such consequences as aforesaid if it is satisfied that the failure to comply with the conditions was accidental or due to inadvertence or to some other sufficient cause. Contd.

.Conversion of a Private Company into Public CompanyConversion by choice (Section 44). If a private company alters its Articles in such a manner that they no longer include the provisions due to which it is categorized as a private company, the company shall cease to be a private company. It shall then, within a period of thirty days after the said date, file with the Registrar either a prospectus or a statement in lieu of prospectus. Besides following formalities need to be fulfilled for this purpose: 1. Passing a special resolution altering the Articles in this behalf and filing a copy thereof with the Registrar of Companies within 30 days of passing the same. 2. Raising its membership to at least seven, if it is below that number. 3. Raising the number of its permanent directors to at least three if the same is below that number. 4. Raising its paid-up capital to minimum of Rs 5 lakhs if it is below that amount. After fulfilling the above requirements the private company becomes a public company.

Conversion of a Public Company into a Private CompanyUnder the proviso to Section 31 (1) and (2A) to the Companies Act , all public companies, whether originally incorporated as a public limited company or at any time converted into a public limited company (under section 44 of the Act), may be converted into a private limited company, if the members so desire. The reasons for such conversion must, however, be just, convincing, and sufficient. The company must not be listed on any recognised stock exchange. In case of a listed company, it will have to wait for at least one year after its delisting. The company is supposed to track the following procedure for such a conversion: I. Publish a newspaper notice in two widely circulated dailies of the state where the Registered office of the company is situated and get a no objection letter from the majority unsecured creditors and all secured creditors. II. Convene a Board meeting for consideration of the proposal of conversion of the company into a private company and prepare the proposal for alteration of Articles or prepare a new set of Articles of Association meeting the requirements of a private limited company. III. Hold the Board meeting and obtain approval of the Board for the proposal, fix up the day, date and time of holding the general meeting of the company, approve notice and explanatory statement and authority to sign notice. Contd.

.Conversion of a Public Company into a Private CompanyI. Hold the general meeting on the fixed day and pass a special resolution authorizing the conversion and for alteration of Articles of Association for incorporation of the definition of a private company. The Articles shall be suitably amended to include the basic restrictions applicable on a private company and other provisions necessary thereto. II. Obtain the approval of the Central Government as required by Section 31. Proviso to Section 31 (1) provides that no resolution amending the Articles, which has the effect of converting a public company into a private company, shall be effective unless it has been approved by the Central Government. III. File a printed copy of the Articles as altered with the Registrar of Companies within one month of the date of receipt of the approval of the Central Government. If satisfied with the above procedure, the Registrar of Companies (ROC) will issue a letter granting its approval for the conversion of a public company into a private company and eventually shall issue fresh certificates of incorporation consequent upon change of name after conversion of the company from 'Public Company' to 'Private Company.

Limited and Unlimited CompaniesA company may be limited or unlimited Limited company A limited company is one wherein the liability of its members is limited and may further be sub-classified as limited by shares or by guarantee as discussed below: Company limited by shares In this case, the liability of members is limited to the extent of uncalled share capital. No member of company limited by the shares can be called upon to pay more than the face value of shares or so much of it as is remaining unpaid. Members have no liability in case of fully paid up shares. Company limited by the guarantee A company limited by guarantee is a registered company having the liability of its members limited by its memorandum of association to such amount as the members may respectively thereby undertake to pay if necessary on liquidation of the company. The liability of the members to pay the guaranteed amount arises only when the company has gone into liquidation and not when it is a going concern. A guarantee company may be a company with share capital or without share capital. Unlimited company . The liability of members of an unlimited company is unrestricted. Therefore their liability is similar to that of the liability of the partners of a partnership firm. However, Companies Act does not permit the formation of an unlimited company.

Section 25 CompaniesAs per the Companies Act, 1956, the name of a public limited company must end with the word Limited and the name of a private limited company must end with the word Private Limited. However, under Section 25, the Central Government may allow certain companies to remove the word Limited / Private Limited from their names if the following conditions are satisfied: (i) The company is formed for promoting commerce , science, art, religion, charity or other socially useful objects. (ii) The company does not intend to pay dividend to its members but apply its profits and other income in promotion of its objectives. The above companies are known as Section 25 companies.

Parent and Subsidiary CompaniesA company shall be deemed to be a subsidiary of another company if: (i) That other company controls the composition of its Board of directors; or (ii) That other company holds more than half in face value of its equity share capital; (iii) Where the first mentioned company is subsidiary company of any company, which is the subsidiary of that others subsidiary. For example, if company B is subsidiary of the company A and company C is subsidiary of company B, therefore company C is also subsidiary of company A. The control of the composition of the Board of directors of the company means that the parent company has the power, at its discretion, to appoint or remove all or majority of directors of the subsidiary company without consent or concurrence of any other person.

Government Companies and Foreign CompaniesGovernment Companies. Government company means any

company in which not less than 51 per cent of the paid up share capital is held by the Central Government, or any state government, or partly by the Central Government and partly by one or more state governments and includes a company which is a subsidiary of a government company. Government company is also governed by the provisions of the Companies Act. However, the Central Government may direct that certain provisions of Companies Act shall not apply or shall apply only with such exceptions, modifications and adaptations as may be specified to such government companies. Foreign Companies. Foreign Company means a company incorporated in a country outside India under the law of that other country and has established the place of business in India.

LIFTING THE CORPORATE VEILThe doctrine of corporate veil implies that a company has a separate personality entirely different from that of its members. This signifies that the company has a life of its own, can own property and deal with it the way it desires, can sue and be sued in its own name, has a life and existence of its own . No member can either individually or jointly claim any ownership rights in the assets of the company during its continuance of business or on its winding up. To facilitate all this, the Act has drawn a thick veil (curtain) between the company and those who have formed or run it. However, the separate personality of a company may create a range of problems due to some unexpected and sometimes unwelcome effects. In a number of circumstances, therefore, the Courts have disregarded the Salomon principle as laid down by the House of Lords. Where the corporate personality is being used unjustly or as a sham device, the Court will ignore the cloak (legal fiction) to reach the person(s) under it or reveal the true form and character of the concerned company. This is known as corporate law concept of lifting or piercing the corporate

..LIFTING THE CORPORATE VEILUnder this doctrine a stakeholder (shareholder or director) of a company is held liable for the debts or liabilities of the company despite the general principle that shareholders are immune from suits in contract or tort that otherwise would hold only the company liable. The rationale

behind this is probably that the law will not allow the corporate firm to be misused or used for the purposes which are not set out in the statute. The circumstances in which the court may rip through the corporate veil to expose its true character and nature may broadly be classified under the

Under Statutory ProvisionsThe Act through its express provisions may not allow the corporate personality advantages in the following cases: 1. Reduction of number of members below the statutory minimum [Section 45]. If at any time, the number of members of a company is reduced below the statutory minimum (seven in the case of a public company and two in the case of a private company), and the company keeps on carrying its business beyond the six months, the privilege of limited liability of shareholders is lost. The law pierces the corporate veil and makes every person (who remains member with the company after six months and is aware of that fact) jointly and severally liable for the payment of debts, contracted during that time. 2. Misrepresentation in prospectus [Sections 6263].Where a prospectus includes any untrue statement, every director, promoter, and every other person, who is a party to such prospectus shall be liable to pay compensation to every person who subscribes for any shares or debentures (on the faith of the prospectus) for any loss or damage he may have sustained by reason or included therein the untrue statement. Besides for any misrepresentation in the prospectus, every person who authorised the issue of the prospectus shall be punishable with imprisonment for a term which may extend to two years, or with fine which may

.Under Statutory Provisions3. Failure to return application money [Section 69] . If minimum subscription of 90 per cent is not received within 90 days from closure of the issue, all monies received from applicants for shares shall be forthwith repaid to them without interest. And if any such money is not so repaid within seventy days of the closing of the issue, the directors of the company shall be personally (jointly and severally) liable to repay that money with interest at the rate of 15 per cent per annum from the expiry of the seventieth day. 4. Misdescription of the companys name [Section 147] . The Act provides that if any officer of the company or other person acting on its behalf or authorizes to be signed on behalf of the company signs any bill of exchange, promissory note, endorsement, cheque or order (draft) for money in which the companies name is not mentioned in legible letters, the signatory director shall be punishable with a fine which may extend to five thousand Indian

5. For investigation of ownership of company [Section 247]. Under Section 247, where it appears to the Central Government that there is good reason so to do, it may appoint one or more inspectors to investigate and report on the membership of any company and other matters relating to the company, for the purpose of determining the true persons who are or have been financially interested in the success or failure of the company; or who are or have been able to control or materially influence the policy of the company. 6. Fraudulent or wrongful trading

.Under Statutory Provisions

Under Judicial InterpretationsIn the absence of express statutory provisions, the corporate veil may also be lifted under judicial interpretations. Following are the some of the circumstances that fall under this category: 1. Prevention of fraud or improper conduct . The courts have been more than prepared to pierce the corporate veil when they feel that a fraud is or could be perpetrated behind the veil. The courts will not allow the Salomon principle to be used as an engine of fraud. 2. Group enterprises . Sometimes in the case of group of enterprises the Salomon principle may not be adhered to and the court may lift the veil in order to look at the economic realities of the group itself. In DHN Food Distributors Ltd. vs Tower Hamlets it has been said that the courts may disregard Salomon's case whenever it is just and equitable to do so. In the above-mentioned case the court of appeal thought that the case in question was one suitable for lifting the corporate veil. Here the three subsidiary companies were treated as a part of the same economic entity or group and were entitled to compensation.

.Under Judicial Interpretations3. Where a company acts as agency for its shareholders . In the case of Bodrip vs Solomon7 , Justice Vaughan Williams expressed that the company was nothing but an agent of Solomon. That the business was Mr. Solomon's business and no one else's; that he chose to employ as agent a limited company; that he is bound to indemnify that agent, the company and that this agent, the company has lien on the assets. However on appeal to the House of Lords it was held that a company did not automatically become an agent of the shareholder even if it was a one man company and the other shareholders were dummies. A company having power to act as an agent may do so as an agent for its parent company or indeed for all or any of the individual members if it or they authorize it to do so. 4. Trust . The courts may pierce the corporate veil to look at the characteristics of the shareholders. In the case of The Abbey, Malvern Wells Ltd vs. Ministry of Local Government and Planning, where all the shares in a company held by educational trusts and the management of the company was in the hands of the trustees, the court lifted the corporate veil so as to impress the companys property

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