The Company Law in India

Urvi Shah
Assistant Professor
of Law
UnitedWorld School
of Law

Unit 1 Overview
Company

Law in India
Key changes in the Companies Act, 2013
Definition of a Company
Characteristics of a Company
Difference : Company and Partnership
Advantages of Incorporation of a
Company
Disadvantages of Incorporation of a
Company
Test Questions

The Company Law- Developments

India

till recently was governed by The

Companies Act, 1956.
The
Companies Act, 1956 has been
amended nearly 24 times since its inception.
Major changes were brought about to this
Act by the Companies (Amendment) Act,
2006.
The Companies Bill 2012 was passed by
the LokSabha on 18th December 2012.
The Companies Bill 2012 was passed in the
Rajya Sabha on 8th August 2013.
It also got presidential assent and has now
become the Companies Act, 2013.
Hence, presently, the Companies Act,
2013 constitutes the Company Law in India.

Key changes in the Companies Act,

2013
Financial

Year Uniform financial year

ending on 31st March every year introduced.
For ease of tax reporting purposes.
Existing companies have two years to align
their financial year with the new requirements.

Members

Maximum number of members in a

Private Co. increased from 50 to 200.

Deposits

Stringent norms provided for

acceptance of fresh deposits from members
and public.

One Person Company and Small Company

Introduces the concepts of a one person company and a
small company
Not have to comply with certain requirements relating
to reporting, board meetings and other procedural
matters.
Dormant Company
recognises the concept of a dormant company
It can be formed for a future project or to hold an asset
or intellectual property, provided it has no significant
accounting transaction
Basically
means
any
transactions
other
than
transactions relating to the maintenance of the
company and compliance with law.
Entrenchment Provisions
Companies can now include entrenchment provisions
within their articles of association.

Corporate Social Responsibility (CSR)

CSR will be made mandatory for Indian companies
with a net worth of INR 500 crores or more, or a
turnover of INR 1,000 crores or more, or net profits
of INR 5 crores or more during any financial year.
The company is required to spend at least 2% of the
companys average annual net profits over the
preceding three financial years on social and
charitable causes annually in accordance with its
CSR policy.
Auditor Rotation
Under the previous Companies Act auditors were
appointed on an annual basis and held office until
the conclusion of the next AGM.
Under the new Companies Act auditors must hold
office until their sixth AGM (i.e. 5 years), although
the appointment still needs to be ratified at each
AGM.
Independent Directors

Loans to Directors

The new Companies Act contains restrictions on

advancing any loan to any director or to any other
person in whom the director is interested

Mergers and Amalgamations

Merger of Indian Co. with a foreign Co. allowed.

Fast track merger for small companies and between

holding Co. and its wholly owned subsidiary introduced.

Class Action Suits

Provisions relating to Class Action Suits introduced.

Members may, if they are of the opinion that the
management or the affairs of the company are being
conducted in a manner prejudicial to the interests of the
company, or its members, file an application before the
National Company Law Tribunal

NCLT (National Company Law Tribunal)

2013 Act replaces the HC with a tribunal known as

NCLT which will consist of Judicial and Technical
members

NFRA (National Financial Reporting Authority)

Nature and Meaning of Company

Company

means a company formed and registered

under the Companies Act, 1956 or under the

previous law relating to companies. [Sec 3(1)(ii)]
An

association of many persons who contribute

money or moneys worth to a common stock and

employ it in some trade or business and who share
profit and loss arising there from. Lord Justice
James
It

has a distinct legal personality and is capable of

enjoying rights and is subject to obligations different

from those enjoyed or borne by its members.

Characteristics of a Company
Incorporated

Association
Artificial Legal Person
Separate Legal Entity
Case: Salomon vs. Salomon & Co. Ltd.
Perpetual Existence
Common Seal
Limited Liability
Transferability of shares

Case Law: Salomon vs. Salomon Ltd

Salomon who carried on prosperous leather business
sold his concern for a sum of 30000 pounds to a
company which he formed consisting of himself, his
wife, daughter and his four sons as shareholders.
His daughter, wife and sons took 1 pound share each
and Salomon took 20000 1 pound shares and
debentures worth 10000 pounds.
Debentures were secured by a floating charge on
Companies Assets.
The Company ran into difficulty and had to be wound
up.
The total assets realized were 6050 pounds.
The unsecured creditors having a claim of 8000
pounds demanded the entire amount from the assets
realized. They pleaded that the Company and
Salomon were one and the same persons and that the
Company was a merely an agent of Salomon.

Company and Partnership: Difference

Company

Partnership

The Companies Act,1956

Now:- The Companies Act,2013

The Indian Partnership Act,1932

Distinct Legal Entity separate

from its members

Does not have a distinct legal

entity

Shareholder has limited liability

Exception: Unlimited Company

Each partner has unlimited

liability and is personally liable
for all the debts of the firm.

Change in capital of the

Company involves legal
formalities

Capital of the firm can be

changed by the mutual consent

Right to control and manage the

business is vested in the Board
of Directors elected by the
shareholders

All the partners of a firm are

entitled to take part in the
management of the business

Audit of the Company is a legal

necessity

Audit not necessity in case of

partnership if the annual total
sales, turnover or gross receipts
in business do not exceed Rs. 40
lakhs

Company Registration is
essential

Partnership May or may not be

registered

No one member can wind up the

Company and winding up

Partnership can be wound up at

anytime by any partner if it is

Advantages of Incorporation
Separate

legal Entity
Perpetual Existence
Limited Liability
Transferability of shares
Number of members
Ease in control and management

Disadvantages of Incorporation of a
Company
Formality

and Expense
Loss of Privacy
Wastage and inefficiency in
management

Test Question 1

A husband and wife who were

the only two members of a
Private Company died in an
accident. Does the Company
also come to an end?

Test Question 2

A, a trader, carries on business

under the name of A & Co. Ltd.
without being incorporated as a
Company with limited liability.
Discuss the consequences of the Act
of A.

Test Question 3
During

a war all the members of a

private Company, while in a general
meeting are killed by a bomb. Does
the company cease to exist because
all the members die?

Kinds of Companies
Statutory

CompaniesThese
are
companies which are created by the special
Act of the legislature e.g RBI, SBI,LIC etc.
These are mostly concerned with the public
utilities as railways, tramways, gas,
electricity Company and enterprises of
national importance.

Registered

CompaniesThese
are
companies which are formed and registered
under the Companies Act 1956.

 Private
A

Company-

Company which has a minimum paid up capital of

Rs. 1,00,000 or such higher paid up capital as may
be prescribed, and by its articles i) Limits the number of its members to fifty;
ii) Restricts the right of transfer of shares, if any;
iii) Prohibits any invitation to the public to subscribe
for any shares or debentures of the company;
iv) Prohibits any invitation or acceptance of deposits
from persons other than its members, directors or
their relatives.
According to Sec 12 of the Companies Act, the
minimum number of members to form a private
company is two. A private company must use the
word Pvt after its name.

 Public

Company A Public Company means a company which is not a Private Company;

has a minimum paid-up capital of Rs 5 lakhs
or such higher capital as may be prescribed;
is a private company which is a subsidiary of
a company which is not a private company. [S.
3 (1) (iv)]
It consists of not less than seven members
and three directors.

 Company limited by Guarantee- A a company having the

liability of its members limited by the memorandum to such
amount as the members may respectively undertake by the
memorandum to contribute to the assets of the company in
the event of its being wound up is known as a Company
limited by Guarantee.
Such company could be a"company limited by guarantee
and not having share capital"or a"company limited by
guarantee and having a share capital".
Unlimited Company- A companynot having any limit on
the liability of its members. The liability of a member
extends to the whole amount of companys debts and
liabilities but the member will be entitled to claim
contribution from other members. The Memorandum and
Articles of such company is as per Table E of Schedule I of
the Act.

Holding & Subsidiary Company

When

a company holds more than half

of the equity capital of another
company, the latter becomes the
subsidiary company and the former is
known as the Holding Company.

Rationale behind the concept of holding

and Subsidiary Company
Public

companies used to hold majority of

the share capital of the Private Companies
Improper use of public money by virtue of
greater freedom bestowed under private
companies under the Act.
Through the introduction of this concept
the private companies were stylized as the
subsidiary of the later and were subject to
almost same discipline as was applicable
to private companies.
The Companies (Amendment) Act, 2000
has included such a private Company
within the definition of a public Company.

 Government

company- 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 of a Government company as thus defined.

provided bysection 620(1)of the Act, the Central

Government may, by notification in theOfficial Gazette,
direct that any of the provisions of this Act (other than
sections 618, 619 and 619A specified in the
notifications:
Shall not apply to any Government company; or
Shall apply to any Government company, only with
such exceptions, modifications and adaptations, as may
be specified in the notification.
As

Foreign

company- Acompany which

is incorporated outside India and has
established a place of business within
India is known as a Foreign Company.

Within

30 days of establishment of
such place of business within India,
the Foreign Company is required to
submit
documents/details
under
section 592. Alterations and changes
in
these
documents/details
are
required to be notified within 30 days.

Lifting or Piercing the Corporate veil

Company

and members are distinct.

Veil between Company and its
members- keeping both separate from
each other.
There are instances where the law
disregards the corporate entity and
pays regard instead to the individual
members behind the legal faade.
This is known as lifting the veil of
corporate personality.

Veil of Corporate personality may be lifted as per the express

provisions in the following instances:

Reduction

of number of members below

statutory minimum.
For establishing the relationship of
Holding and Subsidiary Company
For facilitating the task of an inspector
appointed under Section 235 or 237 to
investigate the affairs of a Company.
For investigation of ownership of
Company.
Protection of revenue.
Prevention of fraud or improper
conduct

Incorporation of a Company
The

formation of a Company is a
lengthy process.
Stages in formation of a Company are
1) Promotion
2) Incorporation
3) Capital Subscription
4) Commencement of Business

Stage 1 Promotion
Promoter

is a person who conceives the idea

of formation of the Company.
Does all the preliminary work necessary
before a Company can be brought into
existence.
Enters into preliminary contracts, finds
funds for registration expenses and
prepares the climate to secure initial capital
of the Company.
However, a person who acts in a
professional capacity is not a promoter, like
an Advocate, Accountant or Auditor etc.

Pre-Incorporation and Preliminary

Contracts
Preliminary

or pre- incorporation
contracts- Contracts entered into by the
promoters before incorporation .Such
contracts are not legally binding on the
Company.
Provisional Contracts- Contracts made
after incorporation but before obtaining
the Certificate to Commence business.
Contracts made after obtaining the
certificate to commence business are
legally binding on the Company.

Stage 2 Incorporation or Registration

Preparatory
1)
2)

3)

4)

steps for Registration:

To ascertain from ROC whether the name
is available or not
To get Letter of Intent under Industries
(Development and Regulation) Act, 1951 if
Companys business comes within the
purview of the Act.
To fix up underwriters, brokers, bankers,
solicitors, auditors and signatories to the
memorandum.
To get the Memorandum and Articles of
Association prepared and printed.

 After

preparatory steps, the promoter makes

an application to the ROC of the State in
which the registered office of the Company is
to be situated.
The Application must be accompanied by the
following documents:
1) Memorandum of Association duly stamped,
signed and witnessed.
2) Articles of Association duly stamped and
signed
by
the
signatories
of
the
memorandum and witnessed.
3) The Agreement, if any
4) The written consent of the Directors
5) The notice of address of the Registered
Office. (may be filed within 30 days)
6) A Statutory Declaration
7) Filing Fees and Registration Fees Schedule X

The

Registrar will scrutinize these

documents and if they are in order, he
will register the Company and issue a
certificate of Incorporation.

Corporate
1)

2)

Identity Number:
The ROC will allocate a CIN to each
company registered on or after 1st
November 2000.
All companies registered prior to 1st
November 2000 will be allotted a
CIN within a year in a phased
manner.

Conclusiveness of Certificate of
Incorporation (Section 35)
Certificate,

once issued is conclusive

evidence of the fact that the Company has
been duly registered.
Once a Certificate of Incorporation has
been granted no one can question the
regularity of the Incorporation.
Rationale : Once a Company is held out to
the world as a Company ready to contract
engagements,
then
it
would
most
disastrous if years after, any person was
allowed to show that it was not properly
registered.

Stage 3 Capital Subscription

Task

of obtaining necessary Capital for the

Company.
Securities
and
Exchange
Board
of
India(SEBI) regulates the issue of capital to
the public.
SEBI has issued guidelines for disclosure
and investor protection that needs to be
complied with by Companies.
After conforming with the guidelines, the
directors file a copy of Prospectus with the
Registrar and invite public to subscribe to
the shares of the Company.

Stage 4 Commencement of Business

Public Company having a share capital and issuing a

prospectus inviting the public to subscribe for its
shares, will have to file the following documents with
the Registrar to secure the certificate of
commencement of business:
Declaration that the shares equal to the amount of
minimum subscription have been allotted.
Declaration that every director has paid the amount
of the shares taken by them in cash.
An application must be submitted to the recognized
stock exchange for permission for dealing in shares
ordebentures.
A copy of prospectus must be filed with Registrar of
Companies.
A duly certified declaration should be given to the
Registrar of Companies on a prescribed form by a
director or secretory declaring that all the conditions

Two important documents of a

Company
MOA

(Memorandum of Association)
The MOA is its charter and it defines
the limitations of the powers of a
company.
It is the foundation on which the
structure of a company is based.
AOA (Articles of Association)
Articles contains the rules and
regulations for internal management of
the Company

Contents of the Memorandum

Name

Clause
Registered Office Clause
Objects Clause
Liability Clause
Capital Clause
Subscription Clause or Association
Clause

Articles

of Association (AOA)

Document

of Paramount importance
AOA prescribe the rules and by- laws
for the general management of the
company and for the attainment of its
objects as given in its memorandum.
Optional for a public company limited
by shares to register articles whereas
Other types of companies are required
to do so compulsorily.
If a public company limited by shares
does not register AOA - Table A model
set of articles to apply automatically

Memorandum of
Association

Articles of Association

It is a charter of a
Company determining the
constitution and activities
of the Company.

It contains rules and

regulations regarding
internal management of
the Company.

Principle document

Subsidiary to
Memorandum. In case of
Conflict between the two,
the memorandum prevails.

Every Company must have

a memorandum

Public Company limited by

shares may or may not
have articles.

Alteration of memorandum
is very much difficult and
strictly regulated

Articles can be easily

altered by a special
resolution.

Doctrine of Ultra Vires

Meaning:

Ultra vires - beyond the

powers
Transactions or Acts of a company
which are outside the ambit of its
objects clause i.e (which are ultra
vires the memorandum)shall be
wholly null and void so far as the
company is concerned
Can never be ratified and validated
even if all the shareholders consent to
ratify.

Ashbury Railway Carriage and Iron Co.

Ltd. Vs Riche (1875- LR 7 HL 653)
MOA

stated that the Company will only sell

and supply carriage construction material.
Company contracted with Riche to finance
construction of Railway line in Belgium.
On repudiation of the contract by the
Company, Riche claimed damages.
House of Lords The contract being of a
nature not included in the Companys objects
was void as being ultravires not only of the
directors but the whole of company and could
not be made valid by ratification on the part of
shareholders, and therefore the company was
not liable to be sued for breach.

A. Lakshamanaswami Mudaliar vs. LIC

Supreme

court of India has

affirmed
that an ultra vires contract
remains ultra vires even if all the
shareholders agree to ratify it.

Rationale behind the Doctrine

Protects

the interest of the

shareholders and creditors of the
Company
Ensures that the funds are not
dissipated in unauthorized
activities

Doctrine of constructive notice

MOA

and AOA become public

documents after registration of a
Company.
It is taken for granted that everyone
who deals with the company is in the
know of these documents.
Legal effect : If a persons deals with a
company in a manner which is
inconsistent with the provisions
contained in MOA and AOA own risk
and cost and shall have to bear the
consequences thereof.

Oakbank Oil Co. v. Crum (1882 8

A.C.65)
It

has been held that anyone dealing

with the Company is presumed not
only to have read the memorandum
and Articles, but understood them
properly.
Thus, Memorandum and Articles of a
company are presumed to be notice to
the public.
Such a notice is called Constructive
notice.

Doctrine of Indoor Management

Outsiders

have a right to assume that the

rules and procedures are being followed
by the company in their regular exercise of
the internal proceedings of the company
Protects the outsiders from the Company
It is the duty of every person to read the
MOA and AOA of the Company but he is
not bound to inquire into internal affairs of
the Company whether they are being
conducted in accordance with the Articles
of the Company.

Landmark Case
Royal British Bank v. Turquand
The

Articles of the Company provided that

the directors could give a bond if
authorized by the resolution of the Company.
Directors gave a bond to Turquand without
passing a resolution.
It was held that the Turquand was entitled
to assume that the resolution was passed.
The Company was therefore bound by the
rule.
Doctrine is also popularly known as the
Turquand rule.

Exceptions to the Doctrine of Indoor

Management
Knowledge

of irregularity cannot claim

the protection of this rule.
Negligence on the part of the outsider
Case: Anand Bihari Lal vs. Dinshaw
and Co.
In this case the plaintiff accepted
transfer of Companys property from its
accountant , the transfer was held void.
Forgery Doctrine does not apply to
forgery because forgery is void abinitio.