Company Law

By:- Prof. Sumit Maheshwari

By:- Prof. Sumit Maheshwari 1

Concept of Company

Prof Heny- “A Company is an artificial person created by law having

separate legal entity, with a perpetual succession and common seal.”

By:- Prof. Sumit Maheshwari 2

 Characteristics of Company
Common Seal Transferability of Shares

Limited Liability

Perpetual Succession

Can Sue
Artificial Person
and Be
Sued

Incorporated
Separate Legal Association
Entity
By:- Prof. Sumit Maheshwari 3
 1. Separate Legal
Entity
• On incorporation under law, a company becomes a
separate legal entity as compared to its members. The
company is different and distinct from its members in law.
It has its own name and its own 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, entering into contracts and suing and being sued
separately.

• Section 9 of the Indian Companies Act, 2013 has an effect

of making the association a legal entity. It is a separate
entity from its shareholders/members. The “separate legal
personality” of the company was well established in the case
of Salomon v. Salomon (1897)

By:- Prof. Sumit Maheshwari 4

Salomon Vs Salomon & Co. Ltd.
FACTS OF THE CASE:-
Aron Salomon had for many years carried on a prosperous business as a leather
merchant. In 1892, he decided to convert it into a limited company and for that
purpose Salomon & Co. Ltd. was formed with Salomon, his wife, his daughter
and his four sons as members, and Salomon as Managing Director.

The company purchased the business of Salomon for £ 39,000. The price was
satisfied by £ 10,000 in debentures, conferring a charge over all the company’s
assets, £ 20,000 in fully paid up £ 1 shares, and the balance in cash. Seven
shares were subscribed in cash by the members and the result was that Salomon
held 20,001 shares out of 20,007 shares issued, and each of the remaining six
shares was held by a member of his family.

The company almost immediately ran into difficulties and only a year later
then holder of debentures (Salomon had transferred his shares to another
person) appointed a Receiver and the company went into liquidation. On
liquidation the state of affairs of the company was broadly like this: Realisable
value of Assets: £ 6,000; Liabilities: Debentures-£ 10,000; Unsecured Debts- £
7,000.

Thus, after paying off the debenture holders nothing would be left for the
unsecured creditors. An action was brought by the liquidator against Salomon
holding him liable to indemnify the company against the company’s trading
debts.
By:- Prof. Sumit Maheshwari 5
 Argument
Salomon Vs Salomon & Co. Ltd. The Liquidator contended that though Salomon & Co. Ltd. Was
incorporated under the Act, the company never had an independent
existence. It was only a one man show since all the shares except six
were held by Salomon himself. The vast preponderance of shares
made Salomon absolute master. The business was solely conducted for
and by him and the company was mere sham and fraud.
Judgement
The House of Lords held that in order to determine the question it is
necessary to look at the statute itself without adding to or taking from
the requirements of the statute. The sole guide must be the statute
itself. In the present case, the Act provided that any seven or more
persons, associated for a lawful purpose may, by subscribing their
names to a memorandum of association and otherwise complying with
the provisions of the Act in respect of registration form a company
with or without limited liability.
The Act further provided that “no subscriber shall take less than one
share.” That there were seven actual living persons who held shares in
the company was never doubted. Since the company fulfilled all the
requirements of the Act, the court held that the company had been
validly formed and was a real company.

By:- Prof. Sumit Maheshwari 6

 Rejecting the contention of the Liquidator that all the shares were bought
Salomon Vs Salomon & Co. Ltd. by Salomon and his family members and that the company was nothing
but one man show, House of Lords held that the provisions of the Act did
not require that the persons subscribing shall not be related to each other
or that holding of a single share shall not afford a sufficient qualification
for membership. Whether the capital of the company is owned by seven
persons in equal share, with the right to equal share in profits, or whether
it is almost owned by one person who takes practically the whole profits, it
does not concern a creditor of the company. The company does not lose its
identity if the bulk of its capital is held by one person. The company at law
is altogether different person from its subscribers. The House of Lords
further stated that the Act said nothing about the subscribers being
independent or that they should take a substantial interest in the
undertaking, or that they should have a mind and will of their own.

To quote Lord Macnaghten: “The company is at law a different

person altogether from the subscribers..and though it may be that
after incorporation the business is precisely the same as it was before
and the same persons are managers, and the same hands receive the
profits the company is not in law agent of the subscribers or trustee
for them. Nor are the subscribers, as members, liable in any shape or
form, except to the extent and in the manner provided in the Act.

By:- Prof. Sumit Maheshwari 7

2. Artificial Person :-
In the eyes of law there are two types of persons viz:
(a) Natural persons i.e. human beings and
(b) Artificial persons such as companies, firms, institutions etc.
Legally, a company has got a personality of its own. Like human
beings it can buy, own or sell its property. It can sue others for
the enforcement of its rights and likewise be sued by others.
3. Perpetual Succession:-
A 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 life of the company. Death or
insolvency of member does not affect the existence of the
company.
By:- Prof. Sumit Maheshwari 8
 4. Common Seal:-
A company is a artificial person and 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 the official signature of the
company. The name of the company must be engraved on the
common seal. Any document not bearing the seal of the
company may not be accepted as authentic and may not have
any legal force.

5. Transferability of Shares:
Shares in a company are freely transferable, subject to
certain conditions, such that no share-holder is
permanently or necessarily wedded to a company. When a
member 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.

By:- Prof. Sumit Maheshwari 9

 6. Limited Liability :-

The liability of the members of the company is limited to

contribution to the assets of the company upto the face
value of shares held by him. A member is liable to pay only
the uncalled money due on shares held by him when called
upon to pay and nothing more, even if liabilities of the
company far exceeds its assets. On the other hand, partners
of a partnership 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. This cannot be done
in case of a company once the members have paid all their
dues towards the shares held by them in the company.
By:- Prof. Sumit Maheshwari 10
 7. Can Sue and Can be Sued :-

A company can sue or be sued in its own name as

distinct from its members.
8. Incorporated Association:-

The Company must be incorporated or registered under the

Companies Act, 2013 or under any previous company law.
The Minimum member required for this purpose is seven
in the case of a public company, two in case of a private
company and one in case of a one person company defined
under S.2(62).
It may also be mentioned that an association of more than
ten persons in the case of banking business and twenty
persons in case of other commercial activities, if not
registered as a company or under any other law, becomes
an illegal association.

By:- Prof. Sumit Maheshwari 11

CLASSIFICATION/KINDS OF COMPANY

Membership

Liability

Control

Ownership

Incorporation

Charitable Motive
By:- Prof. Sumit Maheshwari 12
On the Basis of “MEMBERSHIP”
• The Company on the Basis of Membership has been further divided into
four types as:-

Private Company

Public Company

One Person Company

Small Company

By:- Prof. Sumit Maheshwari 13

 Private Company:-
• According to section 2(68) of the Companies Act, 2013 (as amended in
2015), “Private company” is essentially defined as a company having a
minimum paid-up share capital as may be prescribed, and which by its
articles, restricts the right to transfer its shares.

• A private company must add the word “Private” in its name.

• It can have a minimum 2 and maximum of 200 members. There should be at

least 2 directors in private company only 2 member can also become
director.

• Private companies are those companies whose articles of association restrict

the transferability of shares and prevent the public at large from subscribing
to them.

• No invitation to General Public has been given under Private Companies.

By:- Prof. Sumit Maheshwari 14

 Public Company :-
• Section 2(71) of the Companies Act, 2013 (as amended in 2015),
defines a “public company”.
• A public company must have a minimum of seven members and
there is no restriction on the maximum number of members.
• A private company which is subsidiary of a public company shall
also be considered as a form of public company.
• A public company having limited liability must add the word
“Limited” at the end of name.
• The shares of a public company are freely transferable.
• They Provide invitation to offer for General Public.
• A public company should have at least 3 directors.

By:- Prof. Sumit Maheshwari 15

 One Persons Company :-
• The Companies Act, 2013 also provides for a new type of business entity in the form of a
company in which only one person makes the entire company.

• It is like a one man- army. Under section 2(62), One Person Company (OPC) means a company
which has only one person as a member.

• It combines most of the benefits of a sole proprietorship and a company form of business. It,
therefore, takes away the hassle of finding a co-partner to start a registered business entity.
• The legal and financial liability lie with the Company and not the member. Hence nothing needs
to be shared in the name of the partnership. If one has an idea, he/she can go ahead with it and
start their own OPC.

By:- Prof. Sumit Maheshwari 16

Small Companies :-
• The Concept of small companies has been introduced in the Companies Act, 2013.
• Small Company is a new form of private company under the Companies Act,
2013.
• As per Section- 2(85)- “Small Company” means a company other than a public
company-
i. paid-up share capital of which does not exceed Rs 4 Crore or such higher
amount shall not be more than Rs 10 crore; or
ii. Turnover of which as per its last profit and loss account does not exceed to Rs
40 crores or such higher amount shall not be more than Rs 100 crore.
• Hence small companies are small sized private companies.

By:- Prof. Sumit Maheshwari 17

On the Basis of “LIABILITY”

The Company on the Basis of Liability has been further divided into
three types as:-

Limited by Shares

Limited by Guarantee

Unlimited Liability.

By:- Prof. Sumit Maheshwari 18

 Limited by Shares:-
• It is registered company with limited liability of its members, as per the provision of its
Memorandum.

• The liability is limited to the amount unpaid, on the shares held by them.

• If shares are partly paid, liability of a member is limited to the extent of unpaid value of shares
held.

• Example:- X, Shareholder paid Rs 8 per share (FV= Rs 10.Hence, he can be called upon to
pay Rs 2 per share i.e. his maximum liability in this case shall be Rs 2 per share. It shall be
noted that a shareholder can be called upon to pay the unpaid amount either during the
existence of the company or during winding-up.
By:- Prof. Sumit Maheshwari 19
 Limited by Guarantee :-
• It is registered company with limited liability of its members, E.g, Clubs, trade, associations, societies
etc.
• The liability is limited to such amount as member undertakes to contribute to the assets of the company
in the event of its winding-up. Such guarantee amount must be stated in the Memorandum of
Association.
• Liability of members for guaranteed amount arises only when goes into liquidation (winding-up).
• It shall be noted that “Guarantee Company” can be with or without share capital.
• “Guarantee Company” without share capital is financed by donations, subscriptions, member
contributions.
• Liability of a member of “Guarantee Company” having share capital is two-fold viz to pay unpaid values
of share when called upon and to pay guaranteed amount of liquidation.
• The voting powers depends upon share holding and not the amount guaranteed by each member.

By:- Prof. Sumit Maheshwari 20

 Unlimited Company :-
• It is registered company where the liability of members are unlimited.
• In other words, the members are personally liable for payment for payments of
companies liabilities.
• On winding-up, if the assets of the company are insufficient to pay its liabilities
then the personal property of its members can also be utilized for the payments of
company liability.
• The liability of members is not directly towards its creditors i.e. on liquidation, the
liquidator can ask them to contribute towards the assets of the company. They are
liable towards the company.
• An unlimited company may subsequently converts itself as a limited company
subject to certain liable compliances.
• An unlimited company may or may not have share capital.
By:- Prof. Sumit Maheshwari 21
On the Basis of “CONTROL”

The Company on the Basis of Control has been further divided into two
types as:-

Holding Company

Subsidiary Company

By:- Prof. Sumit Maheshwari 22

 Holding and Subsidiary Company :-
• A Holding Company is a company which has control over another company which is called a subsidiary
company. As per Section- 2(87) of the Companies Act, 2013, a company shall subsidiary company if:
a) Holding Company controls composition of its Board of Directors (i.e. power to appoint, remover
Directors)
b) Holding Company controls more than half (> 50%) of the total share capital; or voting power.
c) It is a subsidiary of a third company which is a subsidiary of the Holding Company.
• For example :- If company ABC controls Company PQR and Company PQR controls Company XYZ,
and then Company XYZ will become subsidiary of Company ABC.
• It should be noted that holding and subsidiary companies are incorporated companies and each is
separate legal entity.
• A relationship of holding company and subsidiary company can be established between an Indian
Company and Foreign Company.

By:- Prof. Sumit Maheshwari 23

On the Basis of “OWNERSHIP”

• The Company on the Basis of Ownership has been further divided into
three types as:-

 Government Company

Foreign Company

Private Company

By:- Prof. Sumit Maheshwari 24

Government Company:-
• Section-2(45) of the Companies Act, 2013, a Government company means a
company where 51% more of the paid-up share capital is held by Central
Government, or by any State Government or Governments or partly by Central
Government or partly by One or more State Governments.

• However, employees of a Government Company are not Government servants and

they have not legal right to claim that the Government shall pay their salaries. A
Govt. Company is a separate legal entity distinct from the Govt. and hence the
company is responsible for payment of salary.

• Government Companies are a part of Public Sector (i.e. Govt. owned

entities).Hence , the auditor of a Govt. Company is appointed /re-appointed by the
Controller & Auditor General of India (C&AG). But, remuneration of the auditor
of a Govt. Company shall be fixed by the company in general meeting.

• In Hindustan Steel Works Construction Ltd Vs State of Kerala, it was held that
despite total control of the Govt., a Govt. Company is neither a Govt. Department
nor a Govt. Establishment and it is just an agency of the Govt.
By:- Prof. Sumit Maheshwari 25
 Foreign Company :-
• Section-2(42) of the Companies Act,2013, a Foreign Company means any company or body
corporate incorporated outside India and has established a place of business in India.
• The expression ‘having a place of business in India’ means that business activity is carried at a
fixed and definite place in India on a continuous basis. This Business activity may be carried
on whether by itself or through an agent, physically or through electronic mode.
• Section-379 of the Companies Act, 2013, a foreign company would be considered to be
carrying on business in India, if at least 50% its paid-up share capital is held by:-
a) One or more citizen of India;
b) One or more companies incorporated in India;
c) One or more citizen of India and one or more companies incorporated in India (Singly or
jointly).
• Every foreign company shall comply with all the laws applicable to Indian companies. E.g.
name ending with the words ‘Limited’ or ‘Private Limited’, maintenance and fillings of
accounts etc. By:- Prof. Sumit Maheshwari 26
On the Basis of “INCORPORATION”

• The Company on the Basis of Incorporation has been further divided

into three types as:-

 Chartered Company

Statutory Company

Registered Company

By:- Prof. Sumit Maheshwari 27

Chartered Company:-

• It is a company created under a special charter granted by a King or

Queen in the exercise of its powers. For example:- East India
Company, Bank of England, Chartered Bank etc. The Charter defines
the nature and powers of such companies. The Companies Act, 2013
does not apply to these companies.

By:- Prof. Sumit Maheshwari 28

 Statutory Company:-
• It is incorporated by a Special Act of the legislature ( i.e. Parliament
or State Legislature). For example :- LIC was created by Life
Insurance Corporations Act, (RBI) Reserve Bank of India Act,
(SEBI) Securities and Exchange Board of India Act.

• Such companies are created for public utility services and their main
object to serve the general public. The powers of such companies are
defined by the Special Act.

• The provisions of Companies Act, 2013 apply to these companies as

long as they are consistent with the provisions of the Special Act.

By:- Prof. Sumit Maheshwari 29

Registered Company:-

• Such company is formed and registered under the Companies Act,

2013 by getting themselves registered with the ROC (Registrar of
Company). A registered company is further classified into Limited and
Unlimited Company.

By:- Prof. Sumit Maheshwari 30

 On the Basis of “CHARITABLE MOTIVE”
Company with Charitable objects:-
• Section-8 of the Companies Act, 2013 permits registration of a company for charitable motive, having limited liability.
• Purpose- promoting art, commerce, science, education, research, religion, sports, charity, ecology etc.
• The Central Government issues license for the formation of such company. A partnership firm is allowed to become a
member of such company.
• Profits, if any, shall be used only for promoting its objects i.e. dividend payment to members is prohibited.
• They need not use the words ‘Limited’ or ‘Private Limited’ at end of its name.
• The Central Government has exempted such companies form certain provisions of the Companies Act, 2013. For
example :- Non-payment of stamp duty upon its registration etc.
• Such company cannot alter its memorandum (mainly object clause) or Articles except with the previous approval of
Central Government in writing. Such Companies can convert itself into company of any other kind, via NOC from
Central Government, Income tax, Charity Commissioner, State Government end passing special resolution at General
Meeting.
• Any violation of terms, conditions may lead to cancellation of license and winding-up. Penalty of Rs 10 Lakh upto Rs 1
crore can be imposed. In case of fraud, directors and officers in default can be imprisoned upto 3 years.

By:- Prof. Sumit Maheshwari 31

 Some other types of Companies
1. Investment Company :- An Investment Company is a company, where the principle business consists of
acquiring, holding and dealing in shares and securities. Investment Companies earn their income through
interest, dividends as well as by capital appreciation (buy low and sell high) involved in dealing in shares and
securities. Examples :- Bajaj Allianz General Insurance Company Limited:, Barclays Capital, Infrastructure
Development Finance Company Limited, Larsen & Toubro Mutual Fund:

2. Producer Company :- A Producer Company is a body corporate having specified objects of activities and
registered as such under the provisions of the Act. The objects of Producer Company include :-
a) Production, procurement, grading, handling, marketing, selling, export of primary produce of the members,
b) Processing including preserving, drying, brewing, canning and packaging of the produce of its members,
c) Manufacturing, sale and supply of machinery, equipment or consumables mainly to members,
d) Providing education on the mutual assistance principles to its members,
e) Rendering technical and consultancy services, training, research and development for promotion of its members,
f) Insurance of producers or their primary produce. Etc.

By:- Prof. Sumit Maheshwari 32

• 3. Associate Company :-
• An associate company, also known as an affiliate company, is a company in which a notable portion
of shares is owned by a parent company. The portion usually lies between 20% and 50%.
Ownership of higher than 50% of the stock legally turns it into a subsidiary of the parent company.
• As per Section 2(6) of the Companies Act, 2013, an Associate Company is defined as follows:
• “Associate Company”, in relation to another Company, means a company in which another
company has a significant influence, but which is not a subsidiary company of the company having
such influence and includes a joint venture company.
• For the purpose of Section 2(6) of the Companies Act, 2013, explanation provided is as below:
• The expression “significant influence” means control of at least twenty percent of total voting
power, or control of or participation in business decisions under an Agreement,
• The expression “joint venture” means a joint Agreement whereby the parties that have joint control
of the arrangement have rights to the net assets of the arrangement.
• Therefore, for a Company to be considered as an Associate Company of another company either the
company should have significant influence over the other Company or it should be a joint venture
company. By:- Prof. Sumit Maheshwari 33
4. Illegal Association :-

• Companies Act, 2013, lists certain associations to be illegal, when that association/ partnership hides from
Companies Act 2013, by non-registration, and carries on profit gaining business. This is known as Illegal
Association.

• Section 464 of the Companies Act, 2013, states that any association or partnership formed exceeding fifty
members for a profit gaining business, without registering it as a company under Companies Act, 2013, is
said to be known as Illegal Association.

5. Not for Profit Associations :-

A not-for-profit organization is an organization that focuses on a particular social cause, and all the money
earned or donated is used in pursuing its objectives and meeting operational costs. Unlike for-profit
corporations, not-for-profit organizations do not distribute their surplus revenues to their owners. Instead,
they use the funds to pursue a specific social cause or advocate for a shared point of view.
By:- Prof. Sumit Maheshwari 34
6. Dormant Company:-
• The Companies Act, 2013 has recognized a new set of companies called as dormant companies.
As per section 455(1) where a company is formed and registered under this Act for a future project
or to hold an asset or intellectual property and has no significant accounting transaction, such a
company or an inactive company may make an application to the Registrar in such manner as may
be prescribed for obtaining the status of a dormant company.
• An ‘inactive company’ means a company which has not been carrying on any business or
operation, or has not made any significant accounting transaction during the last 2 financial years,
or has not filled financial statements and annual returns during the last 2 financial years.
• However, a dormant company shall comply with Companies Act, provisions such as minimum no.
of directors, file such documents and pay such annual fees as may be prescribed to the ROC to
retain its dormant status. It is required to hold atleast one board meeting in each half of a calendar
year and the gap between the two meetings should not be less than 90 days. The ROC shall strike
of the name of a dormant company from the register of dormant companies, which has failed to
comply with the requirements of this section. (Section-455(6)).

By:- Prof. Sumit Maheshwari 35