CHAPTER 2

1. COMPANY Meaning and General Understanding

The word company is derived from the combination of two Latin words, namely, com and panis. The word com means together and panis means bread. Thus initially the word company referred to an association of persons who took their meals together. The merchants in the leisurely past, took advantage of these festive gatherings to discuss their business matters.[footnoteRef:1] [1: Palmer : Company Secretarial Practice, p.1.]

Therefore, the word company connotes two ideas in a legal sense. Firstly, that the members of the association are so numerous that it cannot aptly be described as a firm or a partnership; and secondly, that a member may transfer his interest in the association without the consent of other members. Such an association may be incorporated according to law whereupon it becomes a body corporate or what is usually called a corporation with perpetual succession and a common seal. It is then regarded as legal person separate and distinct from its members.[footnoteRef:2] [2: Shah, S.M. : Lectures On Company Law, (13th Ed.) p.1.]

It was observed in Stanley, Re[footnoteRef:3] that, the word company has no strictly technical or legal meaning. It may be described to imply association of persons for some common object or objects. The purposes for which people may associate themselves are multifarious and include economic as well as non-economic objectives. But, in common parlance, the word [company is normally reserved for those associated for economic purposes, i.e., to carry on a business for gain. [3: [1906] 1 Ch. 131]

So, if we consider the sense mentioned in the stated observation, the company in simple terms, may be described to mean a voluntary association of persons who have come together for carrying on some business and sharing the profits there from.

Before the inception of company as device for business enterprise, two modes of carrying out business activities were commonly prevalent, namely, Monopoly and Partnership. With the advance of time and impact of industrial revolution during 18th Century, the business activities expanded tremendously bringing out a radical change in the pattern of commercial activities. The monopolistic device involved a great risk as it required investment of capital by a single person who in the event of loss, had to bear the entire burden himself. Partnership, on the other hand, was a suitable device for small scale enterprise which could be financed and managed by a limited number of persons called the partners who take mutual interest and there is also mutual trust and confidence among them.[footnoteRef:4] But both of these devices were unsuited to large scale business organizations which involved greater mobilization of resources. Therefore, a new device in the form of company has now become the most dominant mode of carrying out business activities. It provides the structural framework for the modern industrial society.[footnoteRef:5] [4: Avtar Singh, Dr. : Company Law, (10th Ed.), p.1.] [5: Hahlos Casebook on Company Law, (42nd Ed.).]

It should be noted that the Companies Act, 2013 even allows a company to be formed and registered for the promotion of commerce, art, science, sports, religion or charity, etc., for the purposes other than profit making.

2. Definition of a Company-The Companies Act, 2013 doesnt define a company in terms of its features. As we can see that according to Section 2(20) a company is defined as a company incorporated under this Act or under any previous company law. This definition doesnt clearly point out the meaning of a company. In order to understand the meaning of a company, we will have to consider the definitions provided by different authorities.Lord Justice Lindley,[footnoteRef:6] defined company as an association of many persons[footnoteRef:7] who contributed money or moneys worth to a common stock and employ it for a common purpose. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share. The shares are always transferable although the right to transfer is often more or less restricted. [6: Lord Lindley on Companies, p. 1] [7: In view of the newly inducted concept of One Person Company (OPC) in Company Law, this definition cannot be applied.]

According to Graph Evans, in common law, a company is a legal person or legal entity, separate from and capable of surviving beyond the lives of its members.[footnoteRef:8] [8: What is Company? (1910) 26 LQR 259]

According to Lord Justice James, a company means, an association of persons united for a common object. Such association may be in form of an ordinary firm or a Hindu Joint Family business or a society registered under the Societies Registration Act or Provident Fund Society, or a Trade Union or company incorporated by Royal Charter or by an Act of Parliament or by some Indian Law or it may be a company incorporated under an Act relating to companies.

Chief Justice Marshall of the Supreme Court of United States of America defined a joint stock company as, an artificial person- invisible, intangible and existing only in the eyes of the law. Being a mere creation of law, it possesses only those properties which the charter of its creation confers upon it either expressly or as incidental to its very existence, among the most important are immortality and if the expression may be allowed, individuality, properties by which a perpetual succession of many persons is considered as the same and may act as a single individual.[footnoteRef:9] [9: Dormouth Cottege v. Woodward 4 Wheat [US] 518]

Heney has defined a joint stock company as a voluntary organization formed with the object of earning profit, whose capital is divisible into transferable shares and membership is necessary for its ownership.

Prof. Haney says, A company is an artificial person created by law, having separate entity, with perpetual succession and common seal.

As we can see from the above discussion that a company to which the Companies Act, 2013 applies comes into existence only when it is registered under the Act. On registration, a company becomes a body corporate which means that it acquires a legal personality of its own, separate and distinct from its members. A registered company is therefore created by law and law alone can regulate, modify or dissolve it.

3. History of Company Legislation in India-The company legislation in India has closely followed the company legislation in England. The first legislative enactment known as the Joint Stock Companies Act, 1850 which was based on English Companies Act of 1844. This Act recognized companies as distinct legal entities but didnt introduce the concept of limited liability. The concept of limited liability, in India was recognized for the first time by the Companies Act, 1857 closely following the English Companies Act, 1856 in this regard. The Act of 1857, however, kept the liability of the members of banking companies unlimited. It was only in 1858that the concept of limited liability was extended to banking companies also. Thereafter, in 1866, the Companies Act, 1866 was passed for consolidating and amending the law relating to incorporation, regulation and winding up of trading companies and other associations. This Act was based on English Companies Act, 1862. The Act of 1866 was recast in 1882 to bring the Indian Company Law in conformity with the various amendments made to the English Companies Act 1862. This Act continued till 1913 when it was replaced by the Companies Act, 1913. The Act of 1913 had been passed following the English Companies Consolidation Act, 1908. It may be noted that since the Indian Companies Act closely followed the English Acts, the decisions of English courts under the English Company law were also closely followed by the Indian Courts.

The operation of the Companies Act, 1913, however, showed that it was highly unsatisfactory in many respects and therefore needed radical changes. Accordingly, the Indian Companies Act (Amendment) Act, 1936 was passed which came into force on 15th January, 1937. It contained many new provisions specially those relating to managing agency which was peculiar to Indian commerce. During World War II, the management and organization of Joint Stock Companies witnessed a remarkable change which altered the character of trade and industry. About the same time, as a result of the Cohen Committee Report (1945) in England, the U.K. Companies Act, 1948 was enacted repealing the earlier Act. This necessitated review of the Indian Companies Act as well in the light of the changed political and administrative conditions in India due to partition of India and the end of British rule in this country.

At the end of 1950, the Government of independent India appointed a committee under the chairmanship of Shri H.C. Bhaba to go into the entire question of the revision of the Indian Companies Act, with particular reference to its bearing on the development of Indian trade and industry. This committee examined a large number of witnesses in different parts of the country and submitted its report in March 1952. Based largely on the recommendations of the Company Law Committee, a Bill to enact the present legislation namely the Companies Act, 1956 was introduced in parliament. It is significant to note here that the Companies Act, 1956 was the largest of all legislative enactments passed by the Indian Parliament so far. It consists of 658 sections and fourteen schedules.

The major changes that the Indian Companies Act, 1956 introduced over and above the Act of 1913 related to the promotion and formation of companies; capital structure of companies; company meetings and procedures; the presentation of company accounts, their audit, and the powers and duties of auditors; the inspection and investigation of the affairs of the company; constitution of Board of Directors and the powers and duties of Directors, Managing Directors and Managers; and the administration of company law.

The Companies Act, 1956 has been amended several times since its inception. The major amendments were introduced in the years 1960, 1962, 1963, 1964, 1965, 1966, 1967, 1969, 1971, 1972, 1974, 1977, 1985, 1988, 1991, 1993, 1996, 2000, 2001, 2002, 2006, 2009, 2011. These amendments are discussed in brief here.The working of the Companies Act, 1956 for about a period of three years brought to light several lacunae and defects in its provisions. Therefore, the Act was amended by the Companies (Amendment) Act, 1960,[footnoteRef:10] which affected 218 sections, and many new provisions were added which were not the part of the principal Act. [10: Came in to force on 28th December, 1960.]

The Companies (Amendment) Act, 1962 was brought to repair the problems relating to contributions by companies to political parties and powers of board of directors companies to contribute to the National Defence Fund which was a problem consequent to the Chinese invasion of 1962.The Companies (Amendment) Act, 1963 was aimed for the provision of appointment of Companies Tribunal and constitution of the Board of Company Law Administration by the central government and elaborating their powers and functions.

In 1964, the President of India promulgated an Ordinance which inserted a new Section 635-B to the principal Act and thereby provided temporary protection to the employees of the companies whose affairs were being investigated under the Act. This provision was replaced by the Companies (Amendment) Act, 1964.

Acting on the recommendations of Daphtary-Shastri Committee and enquiry report of Dalmia-Jain Group, the Central Government brought the Companies (Amendment) Act of 1965 which amended 50 sections of the principal Act and added ten new sections to it, and also annulled sections 271, 280, 281, and 282. In this amendment, the operation of the Companies Act was extended to Nagaland and it also extended the powers of the Board of Company Law Administration.

The Companies (Amendment) Act, 1966[footnoteRef:11] removed the errors in Section 370 relating to loans to be made by companies to other companies under the same management. [11: (34 of 1966)]

The Companies (Amendment) Act, 1966[footnoteRef:12] cured the apprehensions of Stock Exchanges regarding the period of currency of blank transfers and to remove the lacunae in provisions regarding deposit of shares by way of guarantee. [12: (37 of 1966)]

The Companies (Amendment) Act, 1969 prohibited companies to make contributions to political parties and imposed heavy penalties on companies committing breach of this provision envisaged under Section 293-A. Amendment also abolished Managing agents and Secretaries and Treasurers from the company management. And then onwards the companies were to be managed by Directors or Professional Managers or Managing Directors and not by institutions.

The Companies (Amendment) Act, 1971 empowered the companies to donate or contribute freely to the National Defence Fund without any upper ceiling limit.

The Companies (Amendment) Act, 1972 affected many more changes in the existing Act. Now, in the event of mismanagement in a company, the Central Government could appoint any number of Directors as may deem necessary at that moment. It was made necessary for major companies to appoint secretaries. The provisions relating to the declaration and distribution of dividends were also amended by the Act. The important change which this amendment brought forward was that now the foreign companies of which fifty percent of the share capital was held by Indian citizens or financial institutions incorporated in india, was now to be treated with Indian Companies for the purposes of company law administration. The provisions relating to investigation into affairs of companies were further tightened up.

The Companies (Amendment) Act, 1974 was very lengthy and changed a lot in order of corporate. The major points are- Section 43-A was inerted, whereby a private company whose not less than twenty five percent of the share capital was held by one or more bodies corporate, shall automatically be deemed as a public company. The amendment also provided for the acceptance of deposits from the public which shall then after be regulated by the Companies Act, and also laid down the rule where the violation of the directions o0f the Reserve Bank of India would carry punishment of fine.[footnoteRef:13] [13: Section 58-A of the amended act]

Now, all the unclaimed and unpaid dividends of a public company were to be transferred to an account in a scheduled bank which on expiry of three years would automatically stand transferred to the revenue account of the Central Government.[footnoteRef:14] [14: Section 205-A and 205-B of the amended Act]

The Amended also provided that all the Foreign companies were brought to the footing of Indian Companies, and hence the appointment of the Managing Directors, Working Directors and Whole-time Directors and their emoluments were now to be approved by the Company Law Board. The Company Law Board was further extended from five members to nine members, and also the cities of Delhi, Bombay, Calcutta and Madras got branches of the board. The Company Law Board was also empowered to decide the matters relating to registered office of the company, objects of the company, alteration of memorandum of association etc. which were previously adjudicated by the High Court. Now a company having a paid up share capital of twenty five lakhs or more, was to have a full time secretary and now a firm or a body corporate was not to be appointed as a secretary.[footnoteRef:15] [15: Section 383-A.]

In cases, where demand of goods of any category specified by the government was substantially in excess of production of production or supply of such goods and the services of the sole selling agent were not deemed necessary to create a market of such goods. The Amendment further imposed approval of the Central Government for transfer of shares by companies falling in the same group or within the same category. A new Section 209-A was inserted which provides for inspection of books of account etc. Newly inserted Section 487(7) provided that the Central Government could now nominate even more than two Directors in the Board of Directors of a Company if the public interest so demanded. These Directors would appraise the central government about the affairs of the company through their reports from time to time.The Companies (Amendment) Act, 1977[footnoteRef:16] amended seven sections including Sections 10-E, 58-A, 108-H, 220, 620 and 635 and added section 634-A. Now a company was empowered to make donations for charitable purposes up to five percent of its average profit or up to Rs. 50,000/- whichever was greater. The newly inserted Section 634-A provided that all orders passed by the Company Law board under sections 17, 18, 19, 79, 141 and 186 of the Companies Act shall have the same effect as the orders passed by the court. [16: Act 46 of 1977]

The Companies (Amendment) Act, 1985 brought some changes. The Section 293-A was substituted and now non government companies were made able to donate to the political parties, an amount not exceeding five percent of the profit. A new Section 529-A was inserted and brought workers of the company on the same footing of secured creditors in matters of their legitimate claims in the event of closure of the company. Section 396 was amended in order to transfer the powers of the high court to reassess compensation on appeal in matters of amalgamations, to the Company Law Board.

The Companies (Amendment) Act, 1988 was brought to streamline some of the existing provisions and ensure better administration of the company law. The highlights are- An independent Company Law Board was established to excersise such judicial or quasi judicial functions which were in the domain of the courts or the central governments. This amendment introduced the concept of Company Secretary, and now practicing secretary was authorized to file declaration in compliance with sections 33 and 149 of the Companies Act. The rates of depreciation were now laid down in the Companies Act instead of the Income Tax Act so as to provide transparency in the company affairs. The companies were now made to file a disclosure of information relating to conversion of energy, technology, absorption, foreign exchange earnings and also particulars of employees having some minimum stakes in the company and those drawing remunerations more than that drawn by managerial personnel of the company. The offences relating to company law administration which were punishable with fine were now made compoundable by the amended Act. The requirement of Governments approval for managerial appointments and payment of remuneration has been dispensed with by the amended Act subject to fulfillment of certain statutory guidelines which were incorporated in the Act itself. The amended also introduced certain changes, such as increasing the validity of fully stamped transfer deeds from two to twelve months in case of listed shares; ensuring dispatch of share certificates or debentures within three months of allotment and two months in case of share transfer; and requiring companies to deposit unclaimed dividend in the Unpaid Dividend Account.

In the wake of economic reforms process initiated in 1991, the Government recognized that many provisions of the Companies Act had become anachronistic and were conducive to the growth of the Indian corporate sector in the changing environment. Consequently, an attempt was made to recast the Act, which was reflected in the Companies Bill, 1993. The said bill was subsequently withdrawn.

The Companies (Amendment) Act, 1996 was enacted to carry out some urgent changes and requirements of corporate working. According to this amendment the companies defaulting on repayment of deposits raised earlier, were debarred from raising further deposits and making inter-corporate loans or deposits. The existing ceiling of one thousand rupees on claims of arrears of wages and salaries of employees in case of winding up of a company were enhanced to twenty thousand rupees. Mutual funds and venture capital funds were permitted to vote in respect of their holding in companies. The companies were now allowed to issue preferences shares that were redeemable upto a period of twenty years from the date of issue. The companies were also permitted to change their object clause in memorandum with the necessity of the approval of the company law board.The year 2000, witnessed another bouquet of amendments in the form of Companies (Amendment) Act, 2000in order to provide certain measures of good corporate governance and for ensuring meaningful shareholders democracy in the working of companies. The key features of the amendment are- Section 383-A was amended by including a proviso to sun-section (1), and now the companies with a paid up capital less than fifty lakh rupees were not required to engage a whole time Company Secretary. A new section 192-A was introduced for the passing of resolution by postal ballot which also included voting by electronic means. Newly inserted Section 292-A provided that every public company having paid up capital of not less than five crore rupees shall constitute a committee of the Board known as Audit Committee. If a company which has defaulted in repayment of deposits or any interest thereon to small depositors should on its own volition intimate the Company Law Board with in sixty days from the date of default and furnish particulars of the small depositors. Such information will be given on monthly basis. Offer of securities by a company except non banking financial companies or public financial institutions to more than fifty persons will be treated as a public offer. A new Section 68B has been added which provides that Initial Public Offer of any security by a listed company for ten crores of rupees or more shall be only in dematerialized form so as to comply with the requisite process of Depositories Act, 1996 and regulations made there under.[footnoteRef:17] [17: Vide Section 28 of the Companies (Amendment) Act, 200]

The provisions of the Act relating to issue of prospectus, issue, allotment and transfer of shares and debentures, non payment of dividend etc. in respect of listed companies and the companies which intend to get their securities listed on any recognized Stock Exchange in India will be administered by the SEBI instead of Central Government. The number of companies in which a person could be a director at a time was reduced from 20 to 15. This number excluded directorship in private companies.[footnoteRef:18] [18: Vide amendment in sections 275, 276 & 277.]

New sections 117A and 117C were introduced to provide that trust deed for securing any issue of debentures shall be in such form and shall be executed with in such period as may be prescribed. A Debenture Redemption Reserve had to be created for redemption of debentures, issued after commencement of the Act, and adequate amount had to be credited to the said reserve from out of its profits every year until such debentures were redeemed. The amount credited to the debenture redemption reserve shall not be utilized by the company except for the purposes of redemption of debentures. Section 252 was amended to provided that any company having 1000 or more small share holders may have a Director elected by small share holders in the manner as may be prescribed by the Central Government. The fines for offences provided in various sections of the Act were also increased ten folds of the present fines.

The Companies (Amendment) Act, 2001 amended provisions of section 77A relating to buy back of shares allowing Board of Directors (instead of through special resolution) to buy back shares upto ten percent of the paid up capital and free reserves provided not more than one such buy back is made during a period of one year.

Two amendments were passed in December 2002, namely, Companies (Amendment) Act, 2002 and Companies (Second Amendment) Act, 2002. The first amendment provided for setting up and regulation of cooperatives as body corporate under the Companies Act, 1956 to be called Producer Companies. The objective of the second amendment was to expedite the winding up process of the companies, facilitate rehabilitation of sick industries and protection of workers interest. The second amendment act proposed to rationalize the procedure relating to winding up so that resources could be utilized for better purposes rather than blocking them in sick undertakings and thus, help in reducing the hardships to workers and other interested parties. It also provided for repeal for SICA and dissolution of BIFR. At the same time, it sought to establish a National Company Law Tribunal providing it with powers for expediting the winding up procedure.

The Companies (Amendment) Act, 2006 introduced provisions relating to Directors Identification Number (DIN), and Electronic filing of various returns and forms.

The Companies (Amendment) Bill, 2009 was introduced in the parliament suggesting revision of the entire company law. The aim of the proposed Bill was to ensure that the norms of the corporate governance were strictly followed and to rationalize the entire working of the Company law system with a view of making it more effective and public friendly. The Bill also sought to amend the provisions relating to the appointment, removal, remuneration, etc. of the Directors of companies and re-state their rights and liabilities. The growing importance of e-governance in corporate sector also necessitated consequential changes in the existing provisions.

The Companies (Amendment) Bill, 2011 came out as the outcome of recommendations and suggestions which were made when the Companies Bill, 2009 was withdrawn. Thus, the Companies Bill, 2011, which was passed by Lok Sabha on December 18, 2012 and Rajya Sabha on August 8, 2013 and became the Companies Act, 2013. The main object of the Companies Act, 2013[footnoteRef:19] is to consolidate and amend the law relating to companies so as to provide free access to entrepreneurs to the open global market, ensure transparency and accountability in the working of companies and above all, to protect the interests of investors and stakeholders. The main changes introduced by the Act are following:- [19: (18 of 2013)]

The concept of One Person Company (OPC) has been introduced by this Act which means a private limited company having only one person as a member. Some expressions which were not defined in the preceding legislations were added in the new Act, and about 30 new definitions were added. According to new Act, a new uniform financial year was prescribed for all companies subject to certain exceptions, i.e. from 1st April to 31st March. The private companies can now have maximum members upto an extent of 200 members as against the count of 50 members as provided in the Companies Act, 1956. The preceding Companies Act, 1956 permitted only financial institutions, public sector banks and scheduled banks to issue shelf prospectus, but the new Act empowers SEBI to prescribe classes of companies which can file Shelf Prospectus with the Registrar of Companies. The provisions relating to buy back of shares by companies have been fairly liberalized and now consequent to the enforcement of the Companies Act, 2013, the companies can buy back their shares even if they have defaulted in repayment of deposits or interest payable thereon, redemption of debentures or payment of dividend to shareholders etc. The Non-Banking Financial Companies (NBFCs) will now be governed by RBI rules in the matter of acceptance of deposits and not by the provisions of Companies Act, 2013. The permissible limit of 18 months for holding Annual General Meeting (AGM) from the date of its incorporation has been curtailed to nine months. Therefore, the company shall have to hold its annual general meeting within nine months from the closure of its first financial year, and in other case, within a period of six months from the date of closing of the financial year.[footnoteRef:20] [20: Section 96(1)]

The new Act specifically provides that the books of accounts may be kept in electronic form. Under the new scheme, the company is required to prepare and file financial statement which shall include its balance sheet, profit and loss account and cash flow statement in a consolidated form. The new provision relating to Corporate Social Responsibility (CSR) has been introduced[footnoteRef:21] which provides that every company having a specified net worth or turnover or net profit during any financial year shall constitute the Corporate Social Responsibility Committee of its Board of Directors to formulate policies for the activities specified in Schedule VII of the Act for social and economic welfare of the people, particularly, those who have remained deprived or neglected so far. [21: Section 135]

The new Act makes it mandatory that the prescribed class or classes of companies shall have atleast one woman director. The maximum number of Directors that a company may have is raised from 12 to 15 under the 2013 Act. Also, now a person can become a Director of maximum 20 companies instead of 15 as was provided under the Companies Act, 1956. Out of these 20 companies, he cannot be the Director of more than ten public companies at a time. The Companies Act, 2013 makes it mandatory for a Director wo resigns from his post, to forward the copy of his resignation to the Registrar of Companies within thirty days of such resignation. The new Act, has raised the limit of political contribution by company from 5 percent to 7.5 percent of the average net profit of the company during the three immediately preceding financial years. Section 447 of the 2013 Act provides a new provision defining Fraud in relating to affairs of a company or any body corporate. It also provides stringest punishment for this offence. A new provision has been added which provides that where investigation against any Director, key managerial personnel or any officer of the company for having committed a fraud in the form of any assets, cash or property or in any other manner in relation to the company is reported, the Central Government may file an application to the Tribunal for appropriate orders of disgorgement of such assets, property or cash and the said managerial personnel may be held personally liable for the fraud without any limitation of liability. Such investigation shall not be stopped or stayed even if the share-holders of the company have approved the winding up of the company. The Company Law Board having been abolished, any application against oppression or mismanagement in a company has to be filed before the National Company Law Tribunal (NCLT). The new Act of 2013 seeks to rationalize and revival and rehabilitation of sick companies by providing that a company, which fails to repay the debt of secured creditors representing fifty percent or more of its debt amount may also apply to the tribunal for declaring the company as sick company. A new provision in the form of section 442 is inserted in the Act for setting up mediation and conciliation panel of experts to mediate at the request of parties to the proceedings before the central government i.e., Tribunal or Appellate Tribunal. In the procedure set out for the voluntary winding up of a company, some new requirements have been prescribed.[footnoteRef:22] The company liquidator for a voluntary winding up company shall be appointed from the panel prepared by the Central Government. And also, the Company Liquidator so appointed shall file a declaration in the prescribed form disclosing conflict of interest or lack of independence in respect of his appointment, if any, with the company or the creditors. [22: Section 310]

Consequent to new information technology and internet as a medium of commercial transactions, a new provision giving statutory recognition to filing of applications, documents, inspection, production and evidence of documents kept by Registrar as contained in Sections 398 and 399 of the companies Act, 2013, has been inserted in Section 400 of the Act. This section accepts electronic form to be exclusive, alternative or in addition to physical form, for the aforesaid purposes. The Companies Act, 2013 provides a new provision regarding dormant company.[footnoteRef:23] A company which is formed and registered under the act for some future project or to hold an asset or intellectual property or has no significant accounting transaction, may apply to the Registrar in the prescribed manner for obtaining a status of dormant company. The Registrar shall maintain a register of Dormant Companies. [23: Section 455]

4. Nature and Characteristics of a Company:-(a) Incorporated Association: - An association of persons incorporated according to the relevant law and clothed with legal personality, separate and distinct from the persons constituting it, is known as a corporation. A corporation or a body corporate has been defined in Section 2(11) of the Companies Act, 2013 as follows:-A Body Corporate or Corporation includes a company incorporated outside India, but does not include:-(i) A co-operative society registered under any law relating to co-operative societies; and(ii) Any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf.Thus it may be seen that the expression Corporation or Body Corporate is far wider than the word Company.A corporation is a single person who is the holder for the time being of a perpetual office, or official position e.g. the King or Crown of England or a Bishop are the examples of a corporation-sole. A corporation sole continues to exist even though the human beings go on changing. The manifestation of this concept is to be seen in the maxim, the King is dead, long live the King which refers to the individual who has died and to the corporation which survives.[footnoteRef:24] It is, however, significant to note that though a corporation sole is excluded from the definition of the Body Corporate for the purposes of the Companies Act, 1956, it continues to be a legal person capable of holding property and becoming a member of a company. [24: Sengupta, B.K. : Company Law (1990) p. 2.]

A corporation or a body corporate includes within it a corporation aggregate, a term so commonly used in legal parlance. A corporation aggregate is a collection of many individuals united in one body, under special denominations, having perpetual succession under an artificial form, and vested, by law, with a capacity of acting in several respects, as an individual, particularly of taking and granting property, of contracting obligations, and of suing and being sued ; of enjoying privileges and immunities in common, and of exercising a variety of rights or powers conferred upon it, either at the time of its creation or at any subsequent period of its existence.[footnoteRef:25] [25: Board of Trustees, Ayurvedic & Unani Tibia College v. Delhi Administration, AIR 1962 SC 458]

A company being a corporate body, is the creation of law, unlike human beings, it is an artificial person created by law. As such, it is clothed with many rights and obligations, powers and duties prescribed by law. It is appropriately called an artificial person being invisible, intangible and having its existence only in contemplation or law. Law confers it individuality and immortality. Incorporations offers certain advantages to the business community which other types of business organizations generally dont enjoy.Referring to one man company like that of Salomon & Co. Ltd., Honourable Justice Kania, J. of the Bombay High Court observed:-under the law, an incorporated company is a distinct identity, and although all the shares may be practically controlled by one person, in law a company is distinct entity and it is not permissible or relevant to enquire whether the directors belonged to the same family or whether it is, as compendiously described a one man company.[footnoteRef:26] [26: Praga Tools Corporation v. Imanual, AIR 1969 SC 1306]

In re Kondoli Tea Co. Ltd.,[footnoteRef:27] the High Court of Calcutta Observed that the company was altogether a separate person, different from its shareholders and therefore the transfer was as much a conveyance, a transfer of the property, as if the shareholders had been totally different persons. [27: (1886) ILR 13 Cal. 43.]

The Supreme Court in M/s. Electronics Corporation of India Ltd. v. Secretary, Revenue Dept., Government of Andhra Pradesh,[footnoteRef:28] inter-alia observed that a clear distinction must be drawn between a company and its shareholders, even though that shareholder may be only one i.e. the Central or a State Government. In the eyes of the law, a company registered under the Companies Act is distinct legal entity other than the legal entity or entities that hold its shares. [28: AIR 1999 SC 1734.]

(b) Legal Entity: - unlike partnership, the company is distinct from the persons who constitute it. Hence, it is capable of enjoying rights and of being subjected to duties which are not the same as those enjoyed or borne by its members. As Lord Macnaughten puts it, the company is at law 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 shareholders liability to contribute is measured by the nominal value of the shares he holds, so that once he or someone who held the shares previously paid that nominal value plus any premium agreed on when the shares were issued, he is no longer liable to contribute anything further. However, companies may be formed with unlimited liability of members or members may guarantee a particular amount. In such cases, liability of the members shall not be limited to the nominal or face value of their shares and the premium, if any, unpaid thereon. In the case of unlimited liability companies, members shall continue to be liable till amount is paid off. In case of companies limited by guarantee, the liability of each member shall be determined by the guarantee amount, i.e., he shall be liable to contribute upto the amount guaranteed by him. If the guarantee company also has share capital, the liability of each member shall be determined in terms of not only the amount guaranteed but also the amount remaining unpaid on the shares held by a member.

(c) Separate Property: - The property of an incorporated company is vested in the corporate body. The company is capable of holding and enjoying property in its own name. No member, not even all the members can claim ownership of any item of the companys assets. Thus, where a substantial shareholder insured the companys timber in his own name, he could not recover indemnity when the timber was burnt by fire as he had no insurable interest in the companys property.[footnoteRef:29] [29: Macaura v. Northern Assurance Co Ltd, 1925 AC 619 (HL).]

In India, this principle of separate property was best laid down by the Supreme Court in Bacha F. Guzdar v. CIT, Bombay[footnoteRef:30]. The Supreme Court held that a shareholder is not the part owner of the company or its property; he is only given certain rights by law, for example, to vote or attend meetings, or to receive dividends. The property remains vested in the company whereas the shareholders may come and go but the company may convey, assign, mortgage or otherwise deal with it.[footnoteRef:31] [30: AIR 1955 SC 74] [31: Palmer : Private Companies (1961 Ed.) p. 19]

It was held in Gramophone & Typewriter Ltd. v. Stanley,[footnoteRef:32] that, the property of the company is not the property of the shareholders; it is the property of the company. [32: (1906) 2 KB 856 (869)]

(d) Transferability of Shares: - Section 56 of the Companies Act, 2013, specifically provides that the shares or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of association of the company. Thus the member of an incorporated company can dispose of his share by selling them in the open market and get back the amount so invested. The transferability of shares has two main advantages, namely it provides liquidity to investors and at the same time ensures stability of the company.[footnoteRef:33] The transfer of shares of a company does not in any way affect its existence or management and the shareholder can conveniently get relieved of his liability by transferring his shares to some other person. [33: Barle & Means : The Modern Corporation And Private Property (1932) p. 282]

One particular reason for the popularity of joint stock companies has been that their shares are capable of being easily transferred. The Act in Section 44 echoes this feature by declaring the shares, debentures or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the company. A shareholder can transfer his shares to any person without the consent of other members. Articles of association, even of a public company can put certain restrictions on the transfer of shares but it cannot altogether stop it.The Companies Act, 2013even uploads shareholders agreement providing for Right of first offer and Right of first refusal as valid even in case of a public company.However, a private company is required by law to put certain restrictions on transferability of its shares but the right to transfer is not taken away absolutely even in case of a private company.

(e) Perpetual Succession: - As stated in Section 9 of the Companies Act, 2013, an incorporated company has perpetual succession, that is not withstanding any change in its members, the company shall retain the same entity with the same privileges and immunities, estate and possessions.[footnoteRef:34] In other words, the death or insolvency of individual member does not in any way, affect its corporate existence and the company shall continue its existence as usual until it is wound up in accordance with the provisions of the Companies Act. The perpetual existence of an incorporated company is well illustrated by proverbial saying, members may come and members may go, but the company can go on forever. [34: Canfield & Wormster : Cases on Private Corporation (2nd Ed.) p. 1.]

Professor Gower has cited an interesting illustration to explain the perpetual existence of a company. He says, During the war all the members of a private company were killed by a bomb while they were in a general meeting, but the company still survived and not even a hydrogen bomb could have destroyed it.[footnoteRef:35] [35: Gower : Modern Company Law (2nd Ed.) p. 75.]

The High Court of Calcutta in Gopalpur Tea Co. Ltd. V. Penhok Tea Co. Ltd.,[footnoteRef:36] applying the doctrine of perpetual succession observed that though the whole undertaking of a company was taken over under an Act which purported to extinguish all rights of action against the company, neither the company was thereby extinguished nor anybodys claim against it. [36: (1982) 52 Comp. Cas. 238]

Company being an artificial person cannot be incapacitated by illness and it does not have an allotted span of life. King is dead, long live the King very aptly applies to the company form of organization. Here, the first King is used to refer to the individual monarch and the second King refers to the office of the king, i.e., the institution of monarchy. In these circumstances, the legal heirs of the deceased shareholders will become the members.

(f) Common Seal: - On incorporation, a company acquires legal entity with perpetual succession and a common seal. A company being an artificial person is not bestowed with a body of a natural being. Therefore, it does not have a mind or limbs of a human being. It has to work through the agency of human beings, namely, the directors and other offices and employees of the company. But, it can be held bound by only those documents which bear its signature. Common seal is the official signature of a company. The name of the company must be engraved on its common seal. A rubber stamp doesnt serve the purpose. A document not bearing common seal of the company is not authentic and has no legal force behind it. The person authorized to use the seal should ensure that it is kept under his personal custody and is used very carefully because any deed, instrument or a document to which seal is improperly or fraudulently affixed will involve the company in legal action and litigation.As per Section 22, a company may, under its common seal, through general or special power of attorney empower any person to execute deeds on its behalf in any place either in or outside India. It further provides that a deed signed by such an attorney on behalf of the company and under his seal where sealing is required, shall bind the company and has the effect as if it were under its common seal.

(g) Capacity to sue and be sued :- A company being a body corporate can sue and be sued in its own name. To sue means to institute legal proceedings against a person or to bring a suit in a court of law. All legal proceedings against a company are to be instituted in its own name. Similarly, a company may bring an action against anyone in its own name. a companys right to sue arises when some loss is caused to the company, i.e. to the property of the personality of the company. Hence, the company is entitled to sue for damages in libel or slander as the case maybe.[footnoteRef:37] A company, as a person separate from its members, may even sue one of its members for libel. A company has a right to seek damages where a defamatory material published about it, affects its business. [37: Floating Services Ltd. v. MV San Francisco Dipalola, (2004) 52 SCL 762 (Guj).]

(h) Limitation of Action: - A company cannot go beyond the powers stated in the Memorandum of Association. The Memorandum of Association of a company regulates the powers and fixes the objects of the company and provides the edifice upon which the entire structure of the company rests. The actions and objects of the company are limited within the scope of Memorandum of Association. In order to enable it to carry out its actions without such restrictions and limitations in most cases, sufficient powers are granted in the Memorandum of Association. But once the powers have been laid down, it cannot go beyond these powers unless the Memorandum of Association is itself altered prior to doing so.

(i) Termination of Existence: - A company, being an abstract and artificial person, does not die a natural death. It is created by law, carries on its affairs according to law throughout its life and ultimately is effaced by law. Generally, the existence of a company is terminated by means of winding up. However, to avoid winding up sometimes companies change their form by means of reorganization, reconstruction and amalgamations.

5. Classification of Companies: - As we have discussed earlier that incorporated companies may be formed as chartered companies which were formed under the Royal Charter issued by the British Crown during the British rule in India and have lost its significance; the Statutory Companies are formed by an Act of legislature to carry on a national business; and lastly the Registered Companies are those business undertakings which are incorporated under the Companies Act. However, there can be certain registered companies which are created for non commercial purposes such as propagation of religion, education, charity, etc.The companies may be: - (a) Companies limited by shares; (b) Companies limited by guarantee; and (c) Unlimited companies.(a) Companies Limited by Shares: - A company having the liability of its members by the memorandum, to the amount, if any, unpaid on the shares respectively held by them is termed as a company limited by shares.[footnoteRef:38] Such a company is commonly called Limited Liability Company although the liability of the company is never limited; it is the liability of the members which is limited. The liability of the members can be enforced at anytime during the existence and also during the winding up of the company. Such a company must have share capital as the extent of liability is determined by the face value of the shares. However, except where the articles otherwise provide, there is no liability to pay any balance amount due on the shares, except in pursuance of calls duly made in accordance with law and the articles while the company is going concern or of calls made in the event of winding up of the company. [38: Section 4(1)(d)(i)]

(b) Companies Limited by Guarantee: - A company limited by guarantee can also be called as a Guarantee Company. It is a company where in the liability of its members extends to the amount undertaken to be contributed by each of them towards the assets of the company in the event of its being wound up as stated in the Memorandum of Association of the company. The liability will arise only in the event of company being wound up and not otherwise.

A guarantee company may or may not have a share capital. In case it has a share capital, the liability of the members will also extend to the amount remaining unpaid on their shares in addition to the guarantee amount. The voting power of a guarantee company having share capital is determined by the shareholding of the members.The Companies Act, 2013 specifically provides that the memorandum of a guarantee company must provide a clause stating that every member of the company undertakes to contribute to the assets of the company in the event of its being wound up while he is a member, for payment of debt and liabilities of the company contracted before he ceased to be its member, and of charges, costs and expenses of winding up etc. upto such amount not exceeding a specified amount.A guarantee company must suffix the words Ltd. or Pvt. Ltd., as the case may be, in its name and register its articles along with the memorandum. Such company must also state in its Articles the number of members with which it is registered. The number of members may, however, be altered by a resolution in the general meeting of the company, a notice of which should be given to the Registrar with in thirty days of the date of resolution.A Company limited by Guarantee can either be a private or public company.

(c) Unlimited Liability Company:- A company having no limit on the liability of its members is an Unlimited Company.Section 3(2) of the Companies Act, 2013 allows a company to be formed as an unlimited company. Thus, in the case of an unlimited company, the liability of each member extends to the whole amount of the companys debts and liabilities. It may be seen that that the liability of members of an unlimited company is similar to that of partners but unlike the liability of partners, the members of the company cannot be directly proceeded against. Company being a separate legal entity, the claims can be enforced only against the company. Thus, creditors shall have to institute proceedings for winding up of the company for their claims. But, the official liquidator may call upon the members to discharge the debts and liabilities without limit.An unlimited company may or may not have share capital. An unlimited company is not subjected to any restrictions regarding purchase of its own shares.[footnoteRef:39] Accordingly, such a company may purchase its own shares or advance monies to any person to purchase its shares. [39: Section 67 of the Companies Act, 2013]

Companies with unlimited liability are rarely formed now. But such a company is definitely a suitable choice in cases where heavy liabilities are not likely to be incurred and the other advantages of separate corporate personality are desired.An unlimited company can get itself re-registered as limited liability Company under Section 32 of the Act. The conversion will not affect any debts, liabilities, obligations or contracts of the company existing at the time of conversion and such debts etc. will become enforceable.

The Companies Act, 2013 provides for three basic types of companies which may be registered under the Act:- (i) One Person Company (ii) Private Companies (iii) Public CompaniesWe will discuss the One Person Company under the miscellaneous header, here first we have to clear our understanding about Private and Public Companies.(d) Private Companies:- Section 2 (68) of the Companies Act, 2013 defines a private company as a company which has a minimum paid up capital of one lakh rupees or such higher paid up capital as may be prescribed, and by its articles:-(i) restricts the right to transfer its shares, if any;(ii) except in case of one person company, limits the number of its members to two hundred;Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member;Provided further that:-(A) persons who are in the employment of the company; and(B) persons who having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased,shall not be included in the number of members; and(iii) prohibits any invitation to the public to subscribe for any securities of the company.The Act confers certain privileges on private companies. Such companies are also exempted from complying with some of the provisions of the Companies Act. The reason for these privileges and exemption is that private companies being restrained from inviting capital from public, not much public interest is involved in these companies.A private company shall, however, lose the privileges and exemptions as soon as it ceases to be a private company by choice or by operation of law. But a private company which is or become the subsidiary of a public limited company, shall continue to avail of the privileges and concessions uninterrupted. It is by virtue of these exemptions that a private company has been described as an incorporated partnership, combining the advantages of both elements the privacy of partnership and permanence and origin of the corporate constitution. Ordinary companies are like bees working in a glass hive. Private companies can keep their affairs to themselves.[footnoteRef:40] [40: Edward Manson, The Evolution of the Private Company, (1910) 26 LQR 11]

Younger LJ observed in Commr of Indian Revenue v, Sansom[footnoteRef:41] that private companies exist with the sanction and encouragement of the legislature. [41: (1921) 2 KB 492]

It was held in Vikas Jalan v. Nucon Industries (P) Ltd,[footnoteRef:42] that Private Companies are legal entities as much as public companies. They cannot be called a property of the Joint Hindu Family. [42: (2001) 103 Comp Cas 343 AP]

(e) Public Companies:- According to the Section 2(71) of the Companies Act, 2013 a Public Company means;-(a) a company which is not a private company;(b) has a minimum paid up capital of five lakhs rupees or such higher paid up capital as may be prescribed.Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be a Public Company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles.Thus a public company must be said to be an association consisting of not less than seven members, which is registered under the companies Act, and which is not a Private Company with in the meaning of the Act. The shares and debentures of a public company may be listed on a Stock Exchange and are offered to public for sale.In Shyam Nandan Prasad v. State of Bihar,[footnoteRef:43] the Supreme Court held that a cooperative housing society registered under the Bihar & Orissa Cooperative Societies Act, the paid up capital of which is not subscribed to by Government and the membership of which exceeds fifty is neither a Government company nor a private company, but a public company within the meaning of Section 2(71) of the Companies Act, 2013. [43: (1993) 4 SCC 255 (263)]

(f) One Person Company:- The Companies Act, 2013 has, for the first time , allowed formation of a limited liability company by just one person. Such a company is described under section 3(1)(c) as a private company. One Person Company is a one share holder corporate entity, where legal and financial liability is limited to the company only. In India, the J.J.Irani Expert Committee recommended the formation of One Person Company.Section 2 (62) of the Companies Act, 2013 defines One Person Company to mean a company with only one person as its member. Such company can be formed for any lawful purpose by one person, where the company to be formed is a Private Company by subscribing his name to a memorandum and complying with the requirements of the Act in respect of registration.(g) Small Company:- The concept of a Small Company has also been introduced for the first time in the Companies Act, 2013. According to Section 2(85) of the Act, small company means a company, other than a public company:-(i) Paid up share capital of which does not exceed fifty one lakh rupees or such higher amount as may be prescribed which shall not be more than five crores rupees; or(ii) Turnover of which as per its last profit or loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees.However, the expression small company shall not include:-(i) A holding company or a subsidiary company;(ii) Non-profit association (i.e., companies registered under section 8 of the Companies Act, 2013);(iii) A company or body corporate governed by any special Act.

(h) Foreign Company:- As per Section 2 (42) foreign company means any company or body corporate incorporated outside India which-(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and(b) conducts any business activity in India in any other manner.Sections 380 to 392 of the Companies Act, 2013 contain various provisions which are applicable to the foreign companies. The foreign companies are bound to follow these provisions. If a foreign company fails to comply with these provisions, it will be liable to be sued in respect of any contract, dealing or transaction which may have entered into with others.(i) Government Companies:- Section 2(45) defines a government company to mean any company in which not less than 51% of the paid up share capitals is held by:-(i) The Central Government; or(ii) Any State Government or Governments; or(iii) Partly by the Central Government and partly by one or more State Governments.A subsidiary of a Government company shall also be treated as a government company.A statutory corporation formed under a statute of the Legislature, like Life Insurance Corporation, is not a company under the Companies Act, 2013 or under any previous company law and as such is not a Government Company. these are corporations as distinguished from government companies and are incorporated under separate Acts of the Parliament.(j) Holding and Subsidiary Companies:- Holding or Subsidiary companies are relative terms. Generally speaking, if one company controls another company, the controlling company may be termed as the Holding Company and the company so controlled as a Subsidiary.According to Section 2 (87) subsidiary company in relation to any other company (that is to say holding company) means a company in which the holding company-(i) Controls the composition of the Board of Directors; or(ii) Exercises or controls more than one-half of the total share capital[footnoteRef:44] either at its own or together with one or more of its subsidiary companies. [44: As per Central Government Rules, Total Share Capital, is defined to be aggregate of the paid-up equity share capital and paid-up preference share capital. [Rule No. 1.2(1)(s)].]

However, such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.It worth to note here that a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in (i) or (ii) above is of another subsidiary company of the holding company. furthermore, the composition of a companys board of directors shall be deemed to be controlled by another company if that other company, by exercise of some power exercisable by it at its discretion, can appoint or remove all or a majority of the directors.(k) Dormant Company:- As per Section 455 of the Companies Act, 2013 when a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual statements during the last two financial years, shall be termed as an inactive company. And where such inactive company or any other company formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, may make an application to the Registrar in such manner as may be prescribed for obtaining the status of Dormant Company.