HOW DOES A COMPANY GET RIGHTS?

Foe e.g.: Right to own property, Right to enter into contracts, Right to sue

 That company/individual should have legal capacity

DEFINITION OF A PERSON

 Section 11 of IPC – Person includes company or association or body of persons whether

incorporated or not.
 Section 2(31) of Income Tax Act - Person includes HUF, Individual, Firm, Associations,
Local Authority, Artificial Person, Company

Now as company is included under the definition of person How we conclude that
Company = Artificial Person.

BRACKET/ SYMBOLISTIC THEORY BY IHERING

We want to give a shield, a bracket and not disclose names - as in who owns the company. To
separate the management from the company’s identification.

The name given to Reliance – Artificial Person

People / Members / Shareholders of Reliance – Natural Persons

PROVIDING LEGAL CAPACITY

Just being an Artificial Person will not give you rights on your own name. Unless it gets legal
capacity and is incorporated, it won’t get rights of its own name. It has to be registered and
then be provided with corporate personality. Once it is recognised as an Artificial Person - we
get to know the rights and provide legal capacity. It can be provided in the following manner:

1. Person
2. Artificial person
3. Incorporated and registered under the Companies Act, 1956/2013
4. Legal Existence/ Capacity
5. Becomes “Body Corporate” – S. 2(11) of Companies Act
  It includes a company even incorporated outside India. For e.g.: Amazon, Coca Cola.
It is done so that the company can be sued by the shareholders or any individual.
 The bracket under which an association gets registered becomes body corporate. For
e.g.: 5 people ----- Register their association ----- Reliance Industries (Body Corporate)
 A company registered under Companies Act becomes a body corporate when it has its
own corporate personality and has legal existence.
6. Corporate Personality – Having a separate legal existence
 Corporate Sole – No association, A single Person
 Corporate Aggregate – Company comes under this.

CAN A COMPANY INVOKE FUNDAMENTAL RIGHT?

 Company is not a citizen (+foreign companies)

 Certain rights company can invoke (all right which use the word "person" in constitution)
For e.g. Right to equality if companies are discriminated against
 A company can be a resident and have a nationality
 Rights under Article 19 are invoked by key managerial personnel on behalf of the
company
 Individuals can claim their rights under the company if it meets the criteria of State under
Article 12
 There are no laws which recognize company as citizens.
 Fundamental rights of business/corporates (in Canada and other countries)
 Infrastructure, power supply, labour laws, against corruption, tax relaxation
 Erbis Eng. Co. Ltd. vs. State of West Bengal
 Indo-China Steam Navigation Co. vs. Jasjit Singh

LEGAL PERSON:

 Has a real existence but its personality is fictitious.

 May be real or imaginary, but the law regards them as having rights and duties
 They are also called fictitious, juristic, artificial or moral
 They perform their functions through natural persons only.
Examples: corporations, companies, universities, president, secretaries, municipalities, gram
panchayats, rivers

CORPORATE AGGREGATE

Refers to the group of people who unite to form one body under special denomination. This
body has an artificial form of perpetual succession and is legally vested with the ability to act,
and in some respects, have the same right as individuals

A corporate aggregate can:

 Grant property
 Own property
 Enter into contractual obligations
 Sue and be sued
 Enjoy immunities and privileges

Examples: Chartered universities, railway corporations, municipal corporations, registered

companies

CORPORATE SOLE:

Refers to a series of successive individuals who hold the same title of public office. A
corporate sole is a single individual who within the rights and functions of office has the
ability to take, hold, grant or purchase land and other personal properties. Example: Minister
of Health and Agriculture, Postmaster General, the crown, and ecclesiastics corporations like
bishops.

BASIC CONCEPTS OF A COMPANY

 Corporate Personality

When one or more natural person acts as a single entity for legal purposes and based on a
legal name it gains certain rights, privileges, responsibilities and liabilities. For e.g. Payment
of taxes, to own separate property, right to sue a third party, etc. When an artificial person is
incorporated in accordance with law it acquires a legal/corporate personality which is a pre-
requisite to sign any contract, international documents, treaties, etc. A company registered
under the Companies Act, 1956/2013 is recognized to become a body corporate where:

1. It acquires a legal personality of its own – separate and distinct from its members.
2. It has perpetual succession.
3. It has a common seal.

Characteristics of Corporate Personality

Separate legal entity –

The creditor can recover money only from the company and the property of the company and
cannot sue individual members. The property of the company is for the company’s benefit
and not for the personal benefit of the shareholders.

Limited liability –

It may be limited by shares or limited by guarantee. If limited by shares, the liability of the
members is limited to the value of shares.

Artificial Legal Persons –

It is not a natural person. Cannot act on its own, but through a board of directors elected by
shareholders. Exists in the eyes of law.

Perpetual succession –

A stable form of business organisation which does not depend on death, insolvency or
retirement of shareholders and directors. Members may come and go, but the company is
forever.

Common seal –
It is used for signature, with the name of the company engraved, to legally bind documents.

 Separate Legal Entity

 Salomon vs. Salomon & Co Ltd.

Salomon was a prosperous leather merchant and he was running a sole proprietor business.
He converted his business into a limited company and named it as Salomon & Co Ltd. The
company so formed consisted of Salomon, his wife and four children as members. The newly
formed company purchased the business of Salomon for 39,000 pounds. The purchase
consideration was paid in terms of 10,000 pounds worth debentures conferring a charge over
the company’s assets. Salomon became the major shareholder and a secured creditor. He got
20,000 pounds as fully paid up shares – one pound each and rest in cash. He became the
director of the company.

The company so formed, in less than a year ran into difficulties and went into liquidation.
The assets of the company were not even sufficient to discharge the secured creditors and
nothing was left for the unsecured creditors. The unsecured creditors argued that Salomon
should not get his dues as there is no difference between Salomon and his company.
Therefore, he is the owner of the company.

The Court held that separate legal personality of a company is the bedrock of corporate
democracy and thus a company can own property and deal with it the way it pleases.
Therefore, the business belonged to the company and not to Salomon because a company is
distinct from members who constitutes it. Being a majority shareholder does not take away
the right of being away the debenture holder. It is different from being the creditor of the
company. The Court said he is entitled to get the amount during the liquidation because a
company is separate from the promoter/ shareholder/ director.

 Macaura vs. Northern Assurance Co. Ltd

He owned a timber estate in northern Island, subsequently the asset was purchased by a
company where he agreed accept payment as equity shares of the company. He received
42000 equity shares of 1 pound each and became the majority shareholder of the company.
He took out a fire insurance on timber in his own name which was never transferred in the
name of the company. Shortly after sometime considerable damage was caused by fire to the
subject matter and therefore he sought to recover the damages by claiming his insurance.
However, the Court held that he had no insurable interest in the timber because his relation
was with the company and not with the assets of the company. The Court further held that the
corporator, even if he owns majority shares is not the corporation and therefore has no legal
or equitable interest in the assets of the company.

 Lee vs. Lee’s Air Farming Co. Ltd.

Mr. Lee was the majority shareholder of Lee Farming Co. Ltd. He was also the governing
director of the company. Lee was a qualified pilot and therefore he entered into a contract of
employment with the company as a chief pilot. The contract stated that if an employee died,
his legal heirs will be entitled to compensation. Mr. Lee died in accident and therefore his
widow compensation under the contract

Issues:

1. While holding a position of the sole governing director can you be an employee of the
company?
2. Does being an employee with majority shareholding end your contractual relationship
with the company?

The Court held that the mere fact that someone was the governing director or a majority
shareholder cannot act as a barrier for him to enter into a contract of employment to serve the
company. A company is a separate legal entity and there was no reason to change the validity
of any contractual obligations which was created between the company and the deceased.
Accordingly, as Lee was the employee of the company, his widow is entitled to
compensation.

SUMMARY

1. Every member is distinct from the company.

2. Being a majority shareholder does not make you the owner of the company.
3. Being a majority shareholder does not stop you from being an employee of the company.
4. Contractual relations remain valid even when the person is the majority shareholder,
whole-time director or employee of the company.
5. No member can have any interest in the property of the company.
6. Members are not responsible for the actions taken by the company.

Exception: Lifting of Corporate Veil

The corporate existence separates a company’s identity from that of its promoters or
shareholders. It enables the company to contract in its own name with its shareholders and
third parties, to acquire a whole property in its own name and to sue and be sued in its own
name. A company has perpetual succession, its life is not co-dependent with that of its
shareholders and it remains in existence irrespective of any change in its members until it is
dissolved by liquidation. This is a fiction created by law and enables an organization of
multiple owners to function as a single identity.

There is a veil placed between the corporate legal personality of a company and its
shareholders which cannot be crossed or lifted except in exigent circumstance. In certain
situations, a court main lift or look beyond the fazed of this fictional identity to penetrate into
the inner workings of the company or shareholders beyond the entity. The corporate identity
of a company can be pierced in situation where separate identity is used as a shield masking
wrongful or illegal ends or to commit fraud. Some of these exceptions have been developed
through judicial precedents and have been identified in the statute.

The concept of lifting up of corporate veil is an exception to separate legal entity. It does not
mean that the court can anytime lift this veil but certain parameters had to be established.
When directors, or whosoever be in charge of the company, start committing frauds, or illegal
activities, or even activities outside purview of the objective/articles of the company,
principle of lifting the corporate veil is initiated. It is disregarding the corporate personality of
a company, in order to look behind the scenes, to determine who the real culprit of the
committed offence is. Thus, wherever this personality of the company is employed for the
purpose of committing illegality or for defrauding others, Courts have authority to ignore the
corporate character and look at the reality behind the corporate veil in order to ensure justice
is served.
 LIC vs. Escorts Ltd.

This is one of the first Indian cases which dealt with the issue of separate legal entity and
lifting of the corporate veil. The case dealt with a non-resident portfolio scheme which
existed under the FERA Act. The scheme allowed non-resident companies which were
owned by or in which the beneficial interest vested in a non-resident individual of Indian
nationality was at least 60%, to invest in the shares of Indian companies. Investment was
allowed to the extent of 1%-5% of the paid up equity capital of the Indian company.

Under the scheme 13 companies all owned by CAPRO Group Ltd. invested in Escorts Ltd.,
an Indian company. The investment by 13 capro companies were challenged on the grounds
that it was an attempt to circumvent the prescribed ceiling of 5% under the scheme and Mr.
Swaraj Paul who was the beneficiary of group company had hidden motive.

The SC referring to the judgement of Salomon case established that a company once
incorporated has an independent personality distinct from its members but it also noted that in
certain exceptional circumstances, the corporate personality is to be ignored and individual
members have to be recognised for their actions. The SC also took the opportunity to set out
basic conditions, principles to be applied and various circumstances under which the
corporate veil can be pierced. Such acts would include breach of duty, evasion of tax, breach
of contracts, ultra vires acts and fraudulent conduct. In such situations, to look at the reality
and to know the real state of affairs, the corporate veil must be lifted.

In the above case the SC ruled that in the light of the facts of the case, the 13 companies who
belonged to the capro group ltd. are incorporated as separate companies and merely because
more than 60% of the shares were held by a trust of which Mr. Swaraj Paul and the members
of his family were beneficiaries will not make the investment illegal. The Court ignored the
fact that the identity of the shareholders maybe common recognising each company as an
independent juristic entity.

 State of Rajasthan vs. Gotan Limestone Khanji Udhyog Pvt Ltd.

In the present case, the lessee was a partnership firm which attempted to transfer a mining
lease allotted to it by first converting the firm into a private company. The partners of the
firm were the directors and shareholders of the newly incorporated company. The
shareholders of the company so formed subsequently sold the shareholding to a subsidiary of
Ultratech Cement Ltd. for 160 crores through a private sale of mining lease.

The SC observed that in the recent past there has been serious illegalities in the regulation of
mining lease. The mining rights vest in the State and the State has to regulate transfer of such
rights in the best interest of the people. No lessee can trade mining rights by adopting a
device of forming a private limited company and transfer the entire shareholding only with
the view to sell the mining rights for private profits. Under S.12 of the Minerals Development
& Regulation Act 2015 it has been provided that transfer of mineral concessions can be
allowed only if granted through auction and they are strictly regulated with the doctrine of
public trust. The transformation of the real transaction done by the company cannot be
ignored to find out the substance. The State cannot overlook illegal transfers and any
acquisition of mining lease contrary to the rules is totally unreasonable.

The Company has been formed merely to avoid legal requirements for transferring of mining
lease and to facilitate private benefit to the parties which is detrimental to public interest. The
SC held that the doctrine of lifting the veil can be invoked if there is violation of law by using
the device of being a corporate entity.

What is a separate company under the group?

For E.g. Tata communications, Tata Steel, Tata chemicals under the Tata group (all
subsidiaries). Does this mean Tata chemicals and Tata communications is the same? Are all
companies in a group same or recognised by same name or is it one unit? The answer is no.

What is a subsidiary company?

Whenever a parent company has more than 50% control over another subsidiary. There may
be different sectors. It is upon the company strategy whether to make separate groups and
divisions. In order to make a segregation, sometimes companies start different subsidiaries
with different boards of directors, managers, share trading and so on. This makes each
subsidiary distinct. A subsidiary company is distinct from the holding company.

What are corporate crimes? – White collar crime.

They are committed by corporation or by individuals acting on behalf of the corporation.
There as a need for recognition of white collar crimes. A corporate fraud occurs when a
company or an entity deliberately changes and conceals sensitive information. There can be
several reasons for which companies commit such frauds like making more falsified money,
creating a false image of the company for the market scenario and misguiding Governmental
authorities for tax evasion.

The financial and corporate frauds or scams like Harshad Mehta case, Satyam fiasco, Sahara
case required the attention of law makers. Such frauds made it imperative to evaluate the
standards set in corporate governance and stringent methods were needed to be implemented
to tackle corporate frauds.

CORPORATE CRIMINAL LIABILITY

 It encompasses two elements: Mens Rea and Actus Reus.

 A company being an artificial person cannot have requisite Mens Rea. It is difficult to
identify and prove criminal intent of Juristic Person.
 Corporates cannot be imprisoned; it requires the person to go behind the bars. Physical
persons for proceedings are required.
 Therefore, the law was that a company cannot be prosecuted for offenses that require
imposition of a Mandatory Punishment.

 Iridium India Telecom Ltd. vs. Motorola Inc. & Ors.

In the present case Motorola had floated a private placement Memorandum to obtain funds
and investments to finance one of the Iridium projects. On the basis of the information and
representation made through the memorandum several financial institutions invested in the
project. The project turned out to be unviable and resulted in massive loss to the investors
which was alleged by Iridium to have been caused as a result of Motorola’s false
representation and misstatements in the Private Placement Memorandum. Iridium filed a
criminal complaint against Motorola alleged offense under S.420 and S.120(b) of IPC.

Issue: Whether a company can be prosecuted for an offense for which the mandatory
punishment prescribed is both imprisonment and fine. The Bombay HC squashed the
proceedings stating that a company being an artificial person is incapable of committing the
offense of cheating as it lacks criminal intent and only natural persons are capable of having
guilty mind to commit such offense. The SC set aside the HC findings and asserted that a
corporate body can be criminally prosecuted and they can no longer claim immunity from
criminal prosecution on the ground that they are incapable of possessing necessary Mens Rea.

Corporate bodies can be criminally prosecuted if a rational relationship between an

employer’s criminal conduct and his corporate duties is established and if the Directors, key
managerial personals who are the officers in charge committed an offense with intention of
benefitting the corporation in some manner against the prescribed rules or with the intention
of increasing his own personal gain. Such non-disclosure of proper information would be
treated as fraud and thereby constituting a criminal offense for which the company can be
held liable and the directing mind of the company (the natural persons), by lifting the
corporate veil can be held personally liable.

Supreme Court laid down two tests:

1. Attribution Test

Whose mental element shall be attributed to the company for establishing criminal liability. It
shall depend on the person – in – charge, control and degree of authority.

2. Directing Mind and Will Test

Rigid test of Identification of the company. People named in MOA for handling the affairs of
the company. Identification of the directing minds.

VICARIOUS LIABILITY

The settled position of law is that, if a company commits a criminal offense, the liability rests
with the Director in two ways:

1. Who perpetuated an offense on behalf of the company?

The Director is made accused along with the company. If there is sufficient evidence of the
active role of the person + criminal intent, then the company as well as the director have to be
made parties.
2. When statute itself attracts the Doctrine of Vicarious Liability by providing for such
Liability.

Like laws of FEMA, Scams, IBC, PMLA, etc. There is doctrine of vicarious liability
established.

 There are cases where even though the director is not actively involved, still based on the
position is made party to the case. It is a technical problem.

FEATURES OF A COMPANY

1. Separate Legal Entity

- You have to take insurance in the name of the firm (e.g.: fire insurance)

- Liability of firm and not owners, unless triggered by fraud

- Exception: lifting of corporate veil

2. Perpetual Succession (Section 9)

Whenever you form a company, you have to register yet. S.9 talks about effect of
registration. After registration, it forms a body corporate. Members may leave the company,
but the company will go on unless and until it has not been wounded up.

3. Common Seal (Section 22 read with Section 9)

Before 2015, S.9 also included the concept of common seal. It has now been made optional.
This means that company would have a seal, but any cheques or document where you need a
signature, there are two options- use common seal or the director (or a person who has the
authority) can sign it.

A company may be formed for any lawful purpose by–

 Seven or more persons, where the company to be formed is a public company;

 Two or more persons, where the company to be formed is a private company; or
 One person, where the company to be formed is a One Person Company that is to say, a
private company,
 By subscribing their names or his/her name to a memorandum and complying with the
requirements of this act in respect of registration.

TYPES OF COMPANIES

A. Statutory Company

- Generally companies made under a statute.

- They have their own Act and do not require certain documents.

- Some of the provisions of Company Act would apply unless it is in contradiction with their
own statute. Their statute prevails.

- Generally do not require Memorandum of Association.

B. Registered Company
- We are the ones incorporating, who become promoters, to make it a corporate -
personality and give it legal existence, it needs to be registered under companies act to be
governed by it.
- Documents and forms needed, apply to registrar, get a certificate
- Have to be registered with a particular feature under the Companies Act.

1. Private Company

Private company means a company having a minimum paid-up share capital of one lakh
rupees or such higher paid-up share capital as may be prescribed. The words ‘Private
Limited’ must be added at the end of its name by a private limited company. As per section 3
(1), a private company may be formed for any lawful purpose by two or more persons, by
subscribing their names to a memorandum and complying with the requirements of this act in
respect of registration. Private company is a stock corporation whose shares of stock are not
publicly traded on the open market but are held internally by a few individuals. The
transferability of shares is restricted completely in private limited company. The scope of
private company is limited. It is not listed on stock exchange nor they are traded. It is
privately held by members only. Private companies are not regulated by SEBI. A private
company can be converted into public company and less procedure is required. If a private
company has to convert to a public company, it will make the compliances easier and a
company will exercise greater control. This means a company would no longer hold a
meeting of shareholders and pass a special resolution regarding part related transactions.

2. Public Company

A public limited company is a joint stock company. It is governed under the provisions of the
Indian Companies Act, 2013. While there is no limit on the number of members, it is formed
by the association of persons voluntarily with a minimum paid up capital of 5 lakh rupees.
Transferability of shares have no restriction. The company can invite public for subscription
of shares and debentures. The term public limited is added to its name at the time of
incorporation. It is regulated by SEBI. 25% mandatory public shareholding. Promoter is the
majority shareholder. There are more compliances required in public company to convert to
private company.

Difference between the two:

- Shareholding patterns would vary.

- Limited liability (private) and unlimited liability (public).

- Difference between control of regulators

Q. Can you convert private co. to public?

- Special Resolution

- Amend membership

- Amendment in the articles

- Have to comply with ROC's orders (Form- INC 27 to ROC)

- Private to public will have more compliances. The moment a private company goes for IPO,
they become 'deemed to be a public company'.

Q. Can you convert public co. to private? (S.14 of Companies Act)

- Altering articles

- You will have to let go off members, the shareholders, etc.

- There is a change of structure as a whole.

- All the investments made as a public company by collecting, you have to pay them off. This
could raise a doubt of fraud.

3. One-person company

Several significant concepts have been introduced for the first time under Companies Act,
2013 and one of them being One Person Company. Section 2(62) defines one-person
company as a private company with only one director and one shareholder. However, it can
have more than one director, and up to a maximum of 15. Individual entrepreneurs doing
business as sole proprietors will now be able to avail the benefits of limited liability without a
second person to form a company.

A sole proprietorship form of business might seem very similar to one-person companies
because they both involve a single person owning the business, but they’re actually exist
some differences between them. The main difference between the two is the nature of the
liabilities they carry. Since an OPC is a separate legal entity distinguished from its promoter,
it has its own assets and liabilities.

The promoter is not personally liable to repay the debts of the company. On the other hand,
sole proprietorships and their proprietors are the same persons. So, the law allows attachment
and sale of promoter’s own assets in case of non-fulfilment of the business’ liabilities.

A single person can form an OPC by subscribing his name to the memorandum of association
and fulfilling other requirements prescribed by the Companies Act, 2013. Such memorandum
must state details of a nominee who shall become the company’s sole member in case the
original member dies or becomes incapable of entering into contractual relations.
This memorandum and the nominee’s consent to his nomination should be filed to the
Registrar of Companies along with an application of registration. Such nominee can
withdraw his name at any point in time by submission of requisite applications to the
Registrar. His nomination can also later be cancelled by the member.

Rules regulating the formation of one-person companies expressly restrict the conversion of
OPCs into Section 8 companies, i.e. companies that have charitable objectives. OPCs also
cannot voluntarily convert into other kinds of companies until the expiry of two years from
the date of their incorporation.

4. Small Companies

Small company is a special status given to companies registered under Indian Companies
Act, 2013 due to its scope of business, measured in terms of capital and turnover. The
companies enjoying the status of small company enjoy certain benefits in form of exemption
from applicability of provisions. To claim the status of the small company, it does not need to
register a company in India; rather a company already registered and fulfilling provided
conditions is known as a small company. In the Act, it is stated that the company’s paid-up
share capital should not exceed 50 lakh rupees and along with that the turnover of the
company should not exceed 2 crore rupees. Both the criteria are necessary to be fulfilled for a
company to fall into the category of small company. Amended 2022- Paid up capital below 4
cr not exceeding 10 cr, Turnover below 40 cr not exceeding 100 cr

5. Limited Liability Company

Limited Liability Company is another category of company registered under the Indian New
Companies Act, 2013. New Companies Act, 2013 has defined all rules and regulations
regarding incorporating and registering all limited liability companies. One should apply to
the Registrar of Companies (RoC) by giving all the details regarding company including
name of the company, name and address of board of directors, location of the company as per
the company registration services.

There are two types: By Share and By Guarantee. Limited by shares means where share
capital is present and shareholders have to pay the unpaid capital only. The shareholders have
a limited liability whereas the company has unlimited liability.
 Company limited by shares-

It is a company in which the liability of the members or shareholders is limited that is they
are only liable for the unpaid value of shares held by the member. The unpaid amount can be
called upon any time during the life time or winding up of the company. If the shares of a
member are fully paid up, then his liability will be nil.

 Company limited by guarantee-

In such a company the liability of contributor is limited up to the amount guaranteed or

invested by the contributor towards the assets of the company in the event of its being wound
up. The amount guaranteed can be only demanded at the time of its wound up, hence it is a
reserve capital. Such companies are generally formed to promote art, science, commerce,
sports etc. and are not for profit making. They have contributors instead of shareholders.

6. Unlimited Liability Company

It is a company where the liabilities of the shareholders are unlimited. A company having no
limit on the liability of its shareholders is an unlimited company. Thus the liability may
extend to the personal property of the shareholders in case the company is not able to satisfy
its claims at the time of winding up. The liability of the members is like partnership where
they have to contribute according to the ratio of amount invested in the company. Example-
GE INDIA CO.- strike off.

7. Government Companies

Government company” means any company in which not less than fifty-one per cent of the
paid-up share capital is held by the Central Government, or by any State Government or
Governments, or partly by the Central Government and partly by one or more State
Governments, and includes a company which is a subsidiary company of such a Government
company. A Subsidiary of Government Company shall also be treated as a Government
Company. These Companies are registered as Private Limited Companies through their
management and their control vest with the Government. This is a type of organization where
both the Government and Private individuals are shareholders. Sometimes these Companies
are called as Mixed Ownership Company.
A Government Company may be formed as a Private Limited Company or Public Limited
Company. The name of all Government Companies shall end with the word “Limited”, be it
Public or a Private Company. Government company is a corporate body that is created under
the Indian Companies Act, 1956. It is governed by provisions of Companies Act. Whereas,
statutory corporation is a corporate body created by either Parliament or State Legislature by
a special act which defines its powers, duties and functions.

Examples: SAIL, BHEL, NTPC and GAIL

IMP POINTS:

 If a body is not registered under the Companies Act it is not a registered company.
 If in a registered company, the government does not have 51% stake it is not a
government company.

Public Enterprises:

1. Departmental Undertakings
2. Statutory Corporations
3. Government Companies

8. Departmental undertakings

This is the oldest form of public sector enterprises. The departmental undertaking is
considered as one of the departments of government. It has no separate existence than the
government. It functions under the overall control of one ministry or department of
government.

For example, Railways, post & telegraph, broadcasting, telephone service etc. they are under
a particular statute. It is very easy to form a departmental undertaking as no registration is
compulsory. There is direct parliamentary control. The performance of departmental
undertakings can be discussed in parliament. So there is public accountability. Powers and
function are not derived from companies’ act.
The main difference between a departmental company and a government company is A
departmental undertaking does not enjoy autonomy, whereas a Government company has
some autonomy. A departmental undertaking does not provide for mixed ownership, whereas
a Government company provides for mixed ownership. A departmental undertaking does not
have separate legal entity. But a Government company has separate legal entity.

The main difference between statutory corporation and departmental undertaking is that
departmental undertaking is established by a ministry and statutory corporation is established
by a special act of parliament. Statutory corporation has a separate legal entity while
departmental undertaking does not have separate legal entity.

9. Foreign company

A foreign company is any company or body corporate incorporated outside India which has a
place of business in India where it conducts business in India through an agent, or physically
or through electronic mode or conducts any business activity in India in any other manner. It
can invoke article 14 as well. This definition clearly states that even if the location of the
main server is outside India, it would still come within the purview of the term electronic
mode. The 2013 Act has done away with the requirement of having any sort of physical
presence in India to carry out business in order to be characterized as ‘foreign company’ as
required under the old Act. Now, the entities having any virtual presence would also come
under the ambit of the new Act.

Foreign companies controlled by Indian corporates have been mandated to comply with the
provisions of Chapter 22. If 50% shares are held by Indian citizens it will still be a foreign
company. However, compliances of other provisions will be applicable which are applicable
to Indian companies. Rules of both foreign and Indian companies will be applicable.

Company A- Incorporated outside Indian in which Indian entity hold 50% share capital and
conduct business activity in India. This is a foreign company but because of 50% share
capital provisions other than chapter 22 will also be applicable.

Company B- Indian entity hold 40% share capital- it will be foreign company- chapter 22
will be applicable.
Company C- 70% of share capital is held by Indian citizens- It will not be a foreign
company because it is outside the scope and provisions of chapter 22 will not be applicable.

Company D- No shares are held by Indian citizens and electronic mode is used to conduct
business. Therefore, it is a foreign company.

10. Holding Company and Subsidiary Company

A company shall be deemed to be a subsidiary company if:

 It has control over the composition of the board.

 It exercises control on more than 50% of voting rights.
 Together with its subsidiary it holds 50%.

Situation 1

Reliance Industries limited  Reliance Jio} Controls the Board Decision

Situation 2

Reliance Industries limited  Reliance Retail} 50% voting rights

Situation 3

Reliance Industries Limited} Holding Company and Reliance Jio} Subsidiary

JIO 30% + RIL 20%  XYZ Ltd 50% Together

In the given situations i.e. 1 and 2, It is a Horizontal Arrangement whereas in 3, It is a vertical

arrangement.

Horizontal Subsidiaries

Reliance Industries Limited

 Jio Platform – 50% share

 Retail – 50% Share
 Petroleum – Control over Board
 Network Group – Voting Rights
Vertical Arrangement Subsidiaries

Reliance Industries Limited

 Subsidiary – Jio Platform Limited – 50% share

 Step Down Subsidiary – Reliance Jio ltd. – S1
 Jio Savan or Jio mart – S2

Layers

Companies cannot have layers of subsidiaries beyond such numbers as provided. The Layer’s
Rule 2007 provides cap on layers. A wholly owned foreign company is exempted from the
Layers Rule.

1. Limited to 2 layers of subsidiaries

2. Excluding wholly owned subsidiaries

Wholly owned subsidiaries(WOS): 100% shareholding held by Parent Company

Example 1:

Reliance Industries Limited

1. JIO Platform – 100% - Layer 0 - WOS

Reliance Jio – 50% - Layer 1
Jio saavn – Layer 2

2. JIO Platform – 100% - Layer 0 - WOS

Reliance Jio – 50% - Layer 1
Jio saavn – Layer 2
XYZ – Layer 3 – Not valid

3. Reliance Jio – Layer 1

Jio Saavn – Layer 2
 Due to shell companies being engaged into illicit activities of more than 13 lakh
companies in 2016, Vertical restriction has been implemented.

Rules in Respect to Holding and Subsidiary Company

1. Holding and subsidiary companies are independent legal entities and they cannot be
treated as one single unit for business operations.
2. Holding company is not liable for any payment due of a subsidiary company.
3. The holding company is not liable for payment to the creditors of subsidiary company in
case of winding up.
4. Important- A private company which is a subsidiary of a public company is a public
company. Even when such subsidiary company continuous to be a private company - in
its articles and therefore the relaxation’s available to a private company is not applicable
to its subsidiary.
5. A holding company must contain details and particulars of subsidiary companies.
11. Associate Company
a. When 2 companies have significant influence
 If the company controls at least 20% voting power of the another company
 The company controls and participates in the business decisions of other company under
an agreement.
- Right to appoint majority directors
- Right to control the management of the company
- Right to participate in the policy decision of the company

b. When 2 companies have a joint venture

 Joint control by virtue of agreement.

c. They are not subsidiary

 Should not have more than 50% share.

12. Dormant Company

The concept of dormant company is “Invest Now and Shine Later. A company gets a dormant
status:

1. During Incorporation from ROC

From the beginning you want to show that your company has a dormant status. This means
you are not dealing or there is no business or operations and have not made any significant
transfers. You are just looking for investors or creating assets.

 Start ups
 For future projects
 Hold assets and IPR
 No significant accounting transaction

2. Either you get Dormant status later

 When company gas not filed financial statements or annual returns for 2 financial years
consecutively
 Has not been carrying on any business or operations

How long can you keep the company as a Dormant Company?

Five years – Active or Revive or else ROC will automatically strike off the name from the
record.

Can a public listed company apply for Dormant Status? – Not allowed

 Securities of any company which are not listed on any stock exchange within or outside
India can apply for dormant status.
 In case you make a significant transaction – within 7 days you need to file an e form –
your name will be removed from dormant company.

Essentials:

1. The company should have an outstanding loan whether active or inactive.

2. A company shall have such minimum number of directors and file such documents.
3. Pay such annual fee as may be prescribed to the Registrar to retain its dormant status in
the register.

What is the difference between shell and dormant company?

 Shell company is a company that exists only in paper and has no offices and no
employees
 It is not recognized under companies’ act
 Used for money laundering, illegal activities, etc.

SECTION 8 - COMPANIES

Company is a company which is registered for charitable or not-for-profit purposes. This

Company is, however, similar to a Trust or Society; an exception is that a Section 8 Company
is registered under the Central Government’s “Ministry of Corporate Affairs (MCA)”
whereas the Societies and Trusts are registered under the State Government regulations. This,
however, has various advantages when it is compared to Trust or Society and it also has
higher credibility amongst the donors, Government departments, and other stakeholders.
Further, the key feature of this Company is that the name of the Company can be
incorporated without using the word “Limited” or “Private Limited”. It is always on the
satisfaction of the central government.

Promotion of certain subject or object should be the main motive of the company. Even if
some kind of income or profit is derived even those profits cannot be distributed among the
stakeholders. The profit has to be put forward for the promotional activity. There should be
intention of prohibition of dividend distribution among the shareholders. Whatever privileges
a limited company gets and whatever obligation that the private limited company is
subjected, section 8 companies are bound by the same. The company cannot alter their
memorandum or article unless on the approval of central government.

Formation of a Company with Charitable Interest:

1. Association not for Profit.

2. Generally, not having a capital share.
3. Prohibition on Payments of Dividends.
4. Prior permission of Central Government to be registered as a company under Section 8.

FORMATION OF A COMPANY

Who has the most important role in formation and incorporation of a company?

Promoter is the founding father of a company. He is the one who starts the inception and
establishes the company. As per Section 69 of Companies Act Promoter means a person -

(a) who has been named as such in a prospectus or is identified by the company in the annual
return or

(b) who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise; or

(c) in accordance with whose advice, directions or instructions the Board of Directors of the
company is accustomed to act:

Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a
professional capacity.

What are the steps involved in Incorporation of a Company?

1. To get idea of the business.

2. Analyse the situation of the market.
3. To find out where a profitable business venture can be shelved.
4. Organise and start the process of turning an Idea into Reality.
5. Decide which type of company is required to be formed.
6. Decide an acceptable name of the company by ROC.
7. Decide where the registered office is to be situated.
8. Format the MOA and AOA.
9. Nominate Board of Directors (1st Directors) and Auditors if required.
10. File for Incorporation.

What is the process for Incorporation?

RULE 8 OF COMPANY (Incorporation Rules, 2014)

SECTION 9

Date of Incorporation. Certificate of Incorporation is like the birth certificate. These are the
effects of registration of a company:

 From the date of incorporation, the subscribers to the Memorandum and all subsequent
members of the company are a body corporate.

 A registered company can exercise all functions of a company incorporated under the
Act. Also, the company has perpetual succession with power to acquire, hold, and dispose
of property of all forms. Also, it can contract, sue and be sued by the said name.

 Further, the company becomes a legal person separate from the incorporators from the
date of incorporation. Also, a binding contract comes into existence between the company
and its members as mentioned in the Memorandum and Articles of Association. Until the
company dissolves or the Registrar removes it from the register, it has perpetual
existence.

SECTION 11

Certificate of Commencement of Business has been omitted by 2015 amendment and

therefore permitting all companies whether public or private to commence business
immediately after obtaining COI and CIN. Issued by Centre for Registrar.

ROLE OF PROMOTER

Legal Position of Promoters:

Is he an Agent? – No and Is he a Trustee? – No

Promoter means someone who has control overs the affairs of the company and can give
directions to the Board of Directors.
Fiduciary Duty:

1. Elect first directors of the company

2. File all documents
3. Proper disclosure in prospectus
4. Buy assets, lands and machinery for the benefits of the company
5. Only to disclose any conflict on interest

Liabilities:

Section 26 - Proper Disclosure of matters in prospectus

Section 34 - Omission in Properties

Section 35 - Misstatement or false statement in published document

Section 340 – For breach of trust or contract

Section 15(h) in The Specific Relief Act, 1963

When the promoters of a company have, before its incorporation, entered into a contract for
the purposes of the company, and such contract is warranted by the terms of the
incorporation, the company: Provided that the company has accepted the contract and has
communicated such acceptance to the other party to the contract.

Types of Promoters:

1. Professional

Give back control of the company to the shareholders. It is prevalent in USA, UK and
Germany.

2. Occasional

It helps start-ups.

3. Financial
They help financial institutions.

In India we have Concentrated Ownership Pattern. Here the promoters are the controlling
head of the company.

 Emile Erlanger vs. New Sombrero Phosphate Company

Mr E was a banker who purchased an island containing phosphate mines for 55000 pounds.
In order to obtain profit on resale, he formed a company, New Sombrero Phosphate Co. The
objective of the company was to purchase the lease on an island and work in mining business.

Mr E was named as the promoter and he named 5 directors who were under the Article of
Association, empowered to adopt and carry into effect the contract for purchase, by the
company of the island. Out of 5 directors, 2 directors were abroad and remaining 3 directors
were under the complete control of Mr E.

The directors purchased the island for the company at a price of 1,10,000 pounds. The
prospectus of the company disclosed the purchased amount and nothing more than that. At an
ordinary general meeting, the shareholders raised objections about this purchase and the
matter was therefore put under investigation.

The Court held that a promoter is not prevented from selling his own property to the company
but when he does so he is bound to take care that he sells it to the company through the
medium of board of directors who can exercise independent and intelligent judgement on the
transaction and the promoters in no case shall make secret profits in the name of the
company, therefore the company was authorised to rescind the contract and recover the
amount.

 Situation 1

Mr A and Mr B originated the scheme for the formation of an Infrastructural Company, has
the Memorandum and articles prepared, executed and registered, and appointed the first
directors, settled the terms and made arrangements for advertising and circulating the
prospectus and for placing the capital.
Mr A and Mr B did not become signatory to the MOA neither they took the control of the
company as Directors. They were engaged in the pre-incorporation stage. After incorporation
of the company, it was found that the capital was raised by advertising false statements
during the time of floating the company.

Whether Mr A and Mr B can be held liable after incorporation, if they were not the directors
subsequently?

 Probir Kumar Misra vs. Ramani Ramaswamy

Law is clear that while the company which has come into existence is not bound by the
conduct of the promoter, at the same time it is entitled to make claim against such promoter
in case it was subsequently found that the conduct of the promoter was detrimental to the
interest of the company incorporated on the basis of principles of breach of trust.

MEMORANDUM OF ASSOCIATION

Section 2(56) - “Memorandum” means the memorandum of association of a company as

originally framed or as altered from time to time in pursuance of any previous company law
or of this Act.

It defines the scope of the company. It defines the constitution and the scope of powers of the
company. It is something which cannot be changed. It is the foundation on which the
company is built. It is the whole structure of the company. MOA can be framed and altered
under 2013 Act with very strict regulations. It is a binding document. You cannot go beyond
the objective of the company. For e.g. name of the company, registered office, etc.

According to Palmer, the MOA is a doc of great importance in relation to the proposed
company. It has the following things:

1. Objects for which the company is formed

2. Identifies the possible scope of its operations beyond which its actions cannot go
3. Confines the powers of the company

If anything is done beyond the powers of MOA, it will be ultra vires and therefore void.
Doctrine of ultravires was first laid down in:
 Ashbury Railway Carriage and Iron Co. vs. Riche

The object of the company provided that it was formed to make, sell or lend on hire railway
carriages to carry on the business of mechanical engineers and general contractors. The
company entered into a contract with Richie for financing the construction the construction of
a railway in Belgium. Later on, the company repudiated the contract. Richie brought week
action for damages for breach of contract.

Issues:

1. Whether the financing of construction of railways come within the expression General
Contractors
2. Whether entering into a contract of financing of construction of railways was ultra vires
the company
3. Whether subsequent unanimous ratification by the members of the company would make
ultra vires contract intra vires.

The Court held that the term General Contractors must be taken to indicate the making,
generally, of such contracts which are connected with the business of mechanical engineers.
Therefore, the financing of construction of railways is outside the purview of object clause
and cannot be included within the expression general Contractors. Thus the contract for the
same is ultra vires the company. A contract which is ultra vires the company is void an initio
and has no legal effect. Therefore, actions which are forbidden by the MOA cannot be
rendered intra vires even by unanimous consent or ratification by all the members.

Interpreting the issues, the court saw the object clause. The scope was making, selling and
hiring railway carriages. There was no incidental clause as well which was not even a concept
back then. It was held that Financing of railways was outside the scope and it was ultra vires
was held by the court. The court stated that whatever is not allowed in MOA cannot be done
by mere consenting. Ratification has no say for the purpose of MOA. It needs a strict
amendment. What was the liability of third liability? (Doctrine of constructive notice means
outsider is not protected to something which is not on the contract.)

What is the liability of third party and company according to today's scenario with a
case law?
There is no legal relationship between company and third party if the act is ultra vires. Third
party can bring personal liability against someone but not against company. Company is not
liable. Breach of trust is one such remedy.

Whether MOA is not amendable charter?

Courts said that you can bring changes in the object of MOA. But it cannot be done without
ratification. Alteration can be done by properly following procedure to amend. Section 13 of
act states that there are various clauses which can be amended by following proper procedure.

Whether MOA is an unalterable charter?

In early times it was considered that MOA is the constitution of the company and it must be
unalterable. However, this led to number of difficulties in working of the company.
Subsequently the act was amended to provide alteration of various clauses.

SECTION 13

This section states that except capital clause (which can be altered by ordinary resolution), a
company can alter clauses by passing a special resolution and after complying with all the
procedures.

SECTION 4 – CLAUSES

NAME CLAUSE

First you should have name clause- it should be non-identical. Names which are identical,
undesirable cannot be used.

 Asiatic Government Security Life Assurance Co. vs, New Asiatic Insurance Co. Ltd.
 Vardhman Corp ltd vs Union of India

Vardhman fertilizer and seeds pvt ltd was incorporated on 9th July 1987. It was engaged in
the business of manufacturing and marketing class 1 fertilizers and micro nutrients. The
company got registered its trademark Vardhman with the trademark registry in the year 2007.
Vardhman corp pvt ltd was incorporated in 2009 and started its business of manufacturing
class 1 fertilizers and micro nutrients similar to the business of Vardhman fertilizer pvt
limited. In 2011 Vardhman fertilizer filed an application under section 22 of 1956 act (now
sec 16 of 2013 act) seeking direction to change the name of the company and remove
Vardhman from their name as it was causing great loss of business reputation.

The court held that Vardhman was a registered trademark of Vardhman fertilizers since 2007
and therefore use of the same brand name by the company Vardhman crop which was in
similar business is undesirable and therefore directed the company to remove the word
Vardhman and alter the name clause.

Alteration of Name Clause:

1. By passing a Special Regulation

2. Approval of MCA
3. In case of listed company – SEBI Compliance

The Central Government also checks – Rule 29 of Company Incorporation, 2014

 Company must have filed Annual Returns

 Company must have filed Financial Statements
 Paid deposits on time

REGISTERED OFFICE CLAUSE

1. Name of the state in which registered office of the company will be situated.
2. Address of the office as mentioned in the Certificate of Incorporation.
3. Section 12 (2017 Amendment) – Within 30 days of incorporation of the registered office,
it should be capable of receiving and acknowledging all notices.
Alteration of Registered Office Clause:

1. Within local limits of the city.

a. There has to be a board of directors’ resolution.
b. It should be informed to the registrar within 15 days from the change of address

2. Within one city to another in the same state.

a. A special resolution has to be passed.
b. Form INC 23 along with Affidavit by 2 Key Managerial personnel and the Special
Resolution has to be filled with the regional director.
c. The regional director shall confirm it within 60 days to the ROC.

3. Change of Registered Office from one state to another state.

a. Pass a special resolution.
b. Obtain consent of creditors and debenture holders.
c. File form INC 23 with Affidavit of 2 Key Managerial personnel with Special
Resolution to the MCA i.e. Central Government.
d. Once the confirmation is received, the ROC will certify it within 30 days.

OBJECT CLAUSE

 Purpose for which the company is incorporated.

 Section 3(1) (c) – Company needs to mention incidental objects or ancillary objects.
 Any contract entered by Company beyond the object clause is ultra vires. The tribunal
checks and decides whether the contract is beyond the object clause.

Object clause of the company is the third clause of MOA stating the business objectives and
purpose for which the company is incorporated and any other matter considered necessary in
furtherance thereof. Any act done by the company that is beyond the object empowered is
considered to be ultra vires making the object clause one of the most important clause.

Primarily it is important to note that the object clause of the company can be divided
into following-
1. The objects to be pursued by the company on its incorporation i.e., the main objects

2. Matters which are necessary for furtherance of the main objects i.e., incidental or ancillary
objects

Main objects of the company are the ones that enables you to focus on the primary activity of
the company, incidental or ancillary objects enables you to carry on things that you may
require in the course of business so as to attain the main objects and other objects are those
which a company may keep in store for future so that they may extend their business in
coming times.

Example-

If the main object of a company is to promote sports and provide long-term coaching for
various athletic activities, its incidental or ancillary objects may be to organise seminars,
meetings, conferences, to promote the object of the company or may be to give scholarships,
financial assistance, and grants for achieving its objectives. Its other objectives may be to
purchase, takeover, acquire, or undertake assets or properties for carrying out its business
activities suitable for the purpose of the company.

Alteration of Object Clause:

1. Alteration of objects by a company which has not issued Prospectus

A company which has not issued a prospectus may alter its objects by passing a special
resolution. The requirements of passing a special resolution is exempted for a company
having members up to 200 (Rule 22 (16) of company (management and admin) rules, 2014).

2. Alteration of objects by a company which has issued the Prospectus

A company which has raised money from public and utilized the amount so raised shall
change the object clause by passing a special resolution, but if there is unutilized amount out
of the money so raised the company has to comply with the following procedures-

a. Notice in respect of the resolution sent to the members for altering the objects shall
contain the following particulars.
 Total money received
 Total money utilized
 Unutilized amount of money for the particular objective.
 Particulars of proposed alteration
 Justification of the alteration
 Amount proposed to be utilised for the new object
 Estimated financial impact of the proposed alteration on the earnings and cash flow of the
company

b. The advertisement giving details of the resolution to be passed for alteration in the objects
shall be published in the newspapers, one English and one vernacular newspaper.
c. The advertisement shall be published simultaneously with dispatch of notices to the
shareholders.
d. Notice shall be displayed on the website of the company indicating the justification for
such change.
e. The company shall file form MGT- 14 with all other documents within 30 days of passing
the special resolution.
f. The registrar shall register the alteration and certify it that the company has duly complied
with the compliances and thus the alteration shall be deemed to be complete.

LIABILITY CLAUSE

There are two types of liabilities: Limited and Unlimited.

How can we alter this clause?

 It is a contractual agreement between the shareholders and the company.

 It must be increased by consent in writing.

CAPITAL CLAUSE

This clause indicates the amount of capital with which the company is registered i.e.
authorized capital.

It can be altered by:

 An Ordinary Resolution as the capital will be increasing over time.

 Informing ROC within 30 days.

NOMINATION CLAUSE

In case of one-person-company, in addition to all the other clauses, the Memorandum of

Association contains a clause called the Nomination Clause. This clause mentions the name
of an individual who will become the member in case the subscriber dies or becomes
incapacitated. The nominee must be an Indian citizen and resident of India i. e. he must have
been living in India for at least 182 days in the preceding year. A minor cannot be a nominee.

ARTICLES OF ASSOCIATION

Section 2(5) read with Section 5 and Rule 10 of Companies Incorporation Rules 2014. The
Articles of a company is an important document which is Company’s Rule Book and contains
internal details governing different aspects of the company. It defines the responsibilities of
the directors, the different means by which the shareholders may exert their control over the
Directors and the Company. While the MOA defines the objectives of the company, the AOA
lays down the rules through which the objectives are to be achieved.

Every company formed in India and registered under the Companies Act, is required to have
AOA without which a company cannot be legally formed. The Articles of a company binds
the company with its members and also binds the members to each other as the Articles
constitute a contract between them and therefore a member may sue the company and vice-
versa to enforce and restrain breach of the Articles.

Section 6 of the Companies Act states that in case the Articles are inconsistent with the
Companies Act, the Act will over ride those Articles. Therefore, articles are subsidiary to the
MOA and has to be within the ambit of the Companies Act.

CONTENTS AND FORM OF ARTICLES

Depending upon the type and applicability of the company, a company may adopt regulations
contained in the Model Articles (Schedule 1 – Table f to j). The contents of Articles include
the following information:
a. Appointment, Remuneration, Powers and Proceedings of the Board of Directors and Key
Managerial Personnel.
b. Share Capital, Rights of Shareholders, transfer of shares (voluntary), Transmission of
Shares (out of Succession), Buy Back of Shares, Forfeiture of shares, etc.
c. Includes details about Call on Shares and lien of shares.
d. Provisions relating to Manner in which meetings have to be conducted, voting rights,
proxy, etc.
e. Provisions with respect to Dividends and Powers to borrow/Loan.
f. Manners in which Books of Account are to be kept.
g. Provisions relating to the winding up of the company.

ENTRENCHMENT

Entrenchment provision in the articles is to protect the interest of minority shareholders by

ensuring that amendments of such provisions in the AOA shall be possible after obtaining
approval of all the shareholders.

An entrenchment clause is one which makes certain amendments either impossible or

difficult. These provisions are more restrictive than those whose execution or alteration
cannot be complied only by passing a special resolution. The provision for such entrenchment
clause shall only be made:

A. By private company

During the formation of a company or by an amendment agreed by all members.

B. In a public company

Either during formation of a company or amending the articles by passing a special

resolution.

Extra: Recently it is said that constructive notice has a concept of presumptive title. Due to
difficulty in acquiring knowledge regarding the title of the property, there are a lot of pending
trials in the Court. Nowadays we are moving forward to secure the buyer. NITI Aayog is
preparing a draft model of Land Title Act, 2019. According to this act, Title holders to be
eligible for compensation from government. All the documents will be available digitally.
The concept of conclusive notice will come into place.