You are on page 1of 13

Company Law

The word company is derived from the Latin ( Com= with or together; panis
= bread), and originally referred to an association of persons who took their
meals together.

Origin of Company Law1. Background of Company Law in England.


The history of modern company law in England began in 1844 when the Joint
Stock Companies Act was passed. The Act provided for the first time that a
company could be incorporated by registration without obtaining a royal charter or
sanction by a special Act of Parliament. The office of the Registrar of the Joint Stock
Companies was created but the Act denied to the members the facility of limited
liability.
2. Development of Indian Companies Act.
Indian Companies Acts have been based on the English Acts. Following the
enactment of the Joint Stock Companies Act, 1844 in England, the first Companies
Act was passed in India in 1850.It provided for the registration of the companies
and transferability of shares. Government of India formed a committee of 12
members under chairmanship of Mr H.L.Bhabha based on which Companies Act
1956 was enacted.

Objectives:
The business organization that are formed as per the companies Act 1956 to
achieve following objectivesa) To encourage the investors to do their investments.
b) To ensure proper Administration
c) To prevent Malpractices.
d) To allow for investigation if required.

Definition:
1. General Definition - A Company is a form of business organization in which the
funds of a large number of investors are managed by a few persons for the purpose
of earning profits which are shared by all the investors. It is an association of
persons formed to achieve the common goal/object set by their Board of Directors.

2. Definition outside judicial framework - A company is a voluntary association of


person formed for some common purpose, with capital divisible in parts known as
shares, and with a limited liability. It is some times know as artificial person created
by law, having common object and perpetual succession.

Essential Features of a Company:


Registration & IncorporationA company must be compulsorily registered under the Companies Act 1956.
Where the company to be formed will be a private company, associated for any
lawful purpose may, by subscribing their names to a memorandum of association
and otherwise complying with the requirements of this act in respect of registration,
form an incorporated company with or without limited liability.
Before a company is registered, it is essential to ascertain from the registrar of
companies if the proposed name of the company is approved then the following
documents duly stamped along with the necessary fees are to be filed with the
registrar.

Memorandum of association duly signed by the subscribers

Articles of association duly signed by the subscribers

Agreement which the company proposes to enter into with any individual for
appointment as its managing or whole time director or manager.

A list of directors who have agreed to become the first directors of the
company.

A Declaration stating that all the requirements of the companies act and
other formalities relating to registration have been complied with.

Certificate of incorporation is issued by the registrar after due examination of


the document.

Certificate of commencement of business.

Separate legal entity The Law Treats as company distinct and has its own identity from the person
possessing or owning it.
Solomon Vs Solomon Ltd.(1877)
Mr Solomon formed a company which issued 20000 pounds worth of shares and
10000 pounds worth of debentures (loan) on the security of all assets of the

company. All shares were purchased by Mr. Solomon except one each to wife and
children to form a public Limited company. The entire debentures were also
purchased by Mr. Solomon. The shoe company incurred huge loss but the company
assets were sold for 6000 pounds. Mr. Solomon claimed that all assets are secured
to Debentures he has the first right over the assets. The court was in favour of Mr.
Solomon.It is because of Separate legal entity. Owner is different from company.
Other unsecured creditors could not do anything.

Lifting the Veil of Incorporation or corporate veil - There are exceptions to this
rule when a court will not treat a company as a separate entity. It is used in case the
company is used for a fraudulent purpose or to avoid a legal duty or fraud or
improper conduct or illegal purpose.
Case: U.P. Electricity (Duty) Act, 1952-Whether Renusagar Power Co., respondent
No. 1, is 'own' source of generation of electricity of Hindalco, respondent No. 2
under section 3(1)(c) of-Whether Hindalco is liable to pay electricity duty on that.
Footing - Whether corporate veil should be lifted in the facts of the caseWhether Hindalco is entitled to exemption from levy of electricity duty under subsection (4) of section 3-Of. (Hindalco controls affairs of Renusugar & Renusagar was
brought into existence by Hindalco in order to fulfil the condition of industrial licence
of Hindalco)
Decision: The person generating and consuming energy were the same and the
corporate veil should be lifted. Hindalco and Renusagar
were linked up together.
Renusagar had in reality no separate and independent existence apart from each
other.
Perpetual succession Being an artificial person a company never dies, nor does its life depend on the life
of its members. Members may come and go but the company can go on forever. It
continues to exist even if all its members are dead. The existence of company can
be terminated only by law.
It means that a companys existence persists irrespective of the change in the
composition of its membership
Example: The Damodar Valley Corporation established by the Damodar Valley
Corporation Act, 1948, creates the Corporation as a body corporate with perpetual
succession and common seal under Section 3 of the Act but with no shareholding
and Board of directors, the participating Governments providing the capital. It
expressly provides by Section 5 that every member of a Corporation shall be a
whole time servant of the Corporation
Limited liability A company may be a company limited by shares or a company limited by

guarantee. It means in case of liquidation or winding up of the company the


members cannot be asked to contribute than what is been agreed by them in way
of Share Capital of the company. A person can participate in share cap of
incorporated company and limit his liability to the extent of his participation.
Separate property As a company is a legal person distinct from its members, it is capable of owning,
enjoying and disposing of property in its own name. Although its capital and assets
are contributed by its shareholders, they are not the private and joint owners of its
property. The company is the real person in which all its property is vested and by
which it is controlled, managed and disposed of.

Transferability of shares A company have greatest advantage as its capital is divided in form of its shares
being easily transferable. The Companies Act provides that shares or debentures of
any member in company shall be a movable property, transferable in a manner as
per company act. But in Pvt Ltd company there are certain restrictions on
transferability of share and in partnership the same cannot be done without
agreement of all partners to accommodate new share holder as new partner.
Common seal Since a company has no physical existence, it must act through its agents and all
such contracts entered into by its agents must be under a seal of the company. The
common seal acts as the official signature of the company.
Capacity to sue and be sued A company can sue or be sued in its corporate name.

Types of Companies:

1. Royal Charter or Chartered Companies: These companies are


incorporated under Royal Charter issued by the king or queen. Their powers
and action are governed by the Charter. Example Bank of England.
2. Statutory Companies: These companies are those in corporate under
special act passed by the parliament or the state legislature. Registered
companies those companies are those formed and registered under the
Indian companies act. (SBI, LIC)
3. Registered Companies: Companies that are registered under Companies
Act 1956 and are regulated under this act are Registered Companies. They
have a Memorandum of Association and Articles of Association for their
external and internal regulations. These are further divided into
i. Companies Limited by Shares
ii. Companies Limited by Guarantee
iii. Unlimited Companies
a. Companies Limited by SharesWhere the liability of the members of a company is limited to the amount unpaid on
the shares ,it is known as company limited by shares.
If the shares are fully paid, the liability of the members holding such shares is nil
and company can windup. It may be a public or a private company.
b. Companies Limited by Guarantee These types of companies may or may not have share capital.
The liability of the members of a company is limited to a fixed amount (Guarantee)

which the members undertake to contribute to the assets of a company in the event
of its being wound up, the company is called a company limited by guarantee.
These companies are not formed for the purpose of profit but for the promotion of
art, science, charity, sports, religion or for some similar purposes.
c. Unlimited Companies Sec 12 specifically provides that any 7 or more persons may form an incorporated
company with or without limited liability. In such case every member is liable for the
debts of the company. A company not having any limit to liability of its members is
"Unlimited Company"
An unlimited company may or may not have a share capital. If it has a share capital,
it may be a public company or a private company. It must have its own Articles of
Association.

Distinguish Between Company & Partnership:


Registration:
Membership:

Legal Status:

Property:
Contracts:

Partnership
Registration of a firm is
not necessary.
Minimum 2 person to
make a partnership.
Maximum membership in
case of banking business
is 10 and for others
business is 20 persons.
A firm has no separate
legal status.

Property of the firm is the


property of the partners.
A partner cannot contract

Company
Registration of Company is
compulsory under the
Companies Act
Minimum 2 and Maximum
50 constitutes a Pvt Ltd
Company & Minimum 7
and Maximum Unlimited
constitute a Public Ltd
Company.
A company has a separate
legal status of its own and
is considered to be
separate person from its
members.
Property belongs to the
company.
A shareholder can contract

Management:

Existence:
Liability:

Creditors:

Transfer:

Statutory Obligations:
Death:
Accounts:

Agency:

with the firm.


Management vests in the
hands of the partners
except in the case of a
dormant or sleeping
partner.
Partnership has no
perpetual existence.
Partners of the firm are
liable to unlimited extent
i.e. in partnership, there is
an unlimited liability.
Creditors of the firm are
also the creditors of the
partners individually.
A transferee of a partner's
interest can become a
partner of the firm only
with the consent of all the
partners.
Partnership has less
statutory obligations.
Death of a partner may
mean dissolution of
partnership.
Accounts of the
partnership firm need not
to be audited by an
Auditor.
Every partner is an agent
of the other person.

with the company.


Management vests in the
hands of the Board of
Directors elected by the
shareholders.
Company has perpetual
existence.
The liability of
shareholders is generally
limited.
Creditors are only
creditors of company and
not of individual
shareholders
The transferee becomes a
member of the company.

Company is regulated
strictly under the
Companies Act.
Death of a shareholder
does not affect the
existence of the company.
Accounts of a company
must be audited by
auditor yearly.

Shareholder of a company
is not an agent of the
company or of the other
shareholders.
Further Reading : Bacha F. Guzdar v. C I T, Bombay, (1955) 1 SCR 876 (difference
between a company and a partnership)
Introduction to Public Limited Company & Private Limited Company:
Public Limited Company is the business owned by individuals (and not by a
government). If a public company is a corporation whose stock is traded on a stock
exchange it is said that the stock is publicly traded or that the company is a
publicly-traded corporation.
Private Limited Company is a voluntary association of not less than two and not
more than fifty members, whose liability is limited, the transfer of whose shares is
limited to its members and who is not allowed to invite the general public to
subscribe to its shares or debentures.

Distinguish Between Private & Public Company :


Private
Minimum members in a
private company are 2 and
maximum 50.
Minimum paid-up capital
one lac rupees.

Public
Minimum members in
public company are 7 and
maximum unlimited.
Minimum paid up capital
five lac rupees.

Transfer of shares is strict


and regulated by its articles.
Cannot invite public to
subscribe to its share
capital.

Shares are freely


transferable.
It invites members of
public to subscribe to its
share capital.

It has to use words "Private


Limited" at the end of its
name.
It enjoys certain privileges
i.e. exemptions from certain
provisions of the Companies
Act 1956.
It has to have minimum 2
directors.
No restrictions

It has to use only the word


"Limited" at the end of its
name.
It has no privileges.

Legal Control:

There are less legal controls.

Loans:

Directors can borrow from


the private company.

Regulations are more


strict.
Directors cannot borrow
from the company.

Members:
Capital:
Transfer of shares:
Public Invitation:

Name:
Privileges:

Number of directors:
Restrictions on
appointment of
directors

It has to have minimum 3


directors.
Directors must file their
consent to act as directors
with the Registrar.

Public Sector Undertaking: A public sector undertaking (PSU) is any enterprise or


corporation established and managed by government not necessarily in the utilities
sector. PSU is the term in India, "Government Owned and Controlled Corporation"
(GOCC), and "State Owned Enterprise" (SOE).
It is a company in which government holds not less than 51% of paid-up share
capital.
Board of Directors are appointed by the shareholders. But since government owns
majority of the shares, majority of directors are chosen by the government.

This company does not need Parliaments approval on how to use the profit, But it
will need approval of Board of directors on how to spend the profit.

Example: ONGC Ltd & SAIL & Air India. There are about 237 PSUs all over India.

Holding and Subsidiary company:


When one company controls another company it is called a holding company. The
other company which it holds is called a subsidiary company. Both companies have
separate legal entities. Subsidiary company cannot hold shares or assets of holding
company.
One company may have control on other company in following ways:
i.

Where it controls the composition of Board of Directors of another


company or,

ii.

Where it controls more than half of the total voting power of the other
company, or

iii.

Where it holds more than half of the nominal value of equity share capital
of other company; or

iv.

Where it is a subsidiary of any company which is the subsidiary of some


other company.

Memorandum of Association:

It is a fundamental document (printed and signed) which contains the fundamental


condition on which alone the company is allowed to be incorporated.
It lays down the area of operation of the company thus providing it a framework,
any act outside this framework is considered void.
It regulates the internal affairs of the company in relation to the outsiders.
The memorandum is essentially for external consumption as it sets out the names
of the promoters, the share capital and the purpose (objects) of the company. This is
useful information for potential customers and investors defined into various
clauses.

Articles of Association:
AOA is subordinate to the memorandum.
AOA of a company as originally framed or as altered from time to time in pursuance
of any previous companys law or act.
They are the bye-laws of the company according to which director and other officers
are required to perform their functions as regards the management of the company,
its accounts and audit.
They can be easily altered by passing a special resolution. But alterations should
not be inconsistent with the provisions of the Act or any other statute, and
conditions contained in the Memorandum.
AOA contains:

Different classes of shares and rights of shareholders.

Procedure for making an issue of share capital and allotment thereof.

Procedure for issue of share certificates and share warrants.

Forfeiture of shares and the procedure for their reissue.

Procedure for transfer and transmission of shares

Case: M.R.Kamath VS Canara Banking Corporation Ltd.


A Company passed a resolution expelling a member and authorizing the directors to
register the transfer of his shares without the transfer deed. Held the resolution was
in violation of provision relating to the transfer under the act.

Constructive Notice:
Memorandum and Articles on registration with Registrar Of Company assumes the
character of Public documents.
Any outsider can obtain the document for information or inspection to ensure his
contract duly follows all rules & regulations of Memo & Articles.
It is therefore duty of every person who deals with company to know and
understand the documents before contract as its pre assumed that the person have
read them.
Both Memo & Article are considered as notice to public also known as Constructive
Notice.
Kotla Venkata Swami Vs Ram Moorthy Case: The Articles of Association of the
company contained a clause that all deeds and documents shall be signed by the
Managing Director, the secretary and the working Director on behalf of the
company. A deed of mortgage was signed by the secretary and the working director
only.
Decision: It was held that the Mortgage was invalid in spite of the fact that the
plaintiff acted in good faith and the money was utilized for the company. The
mortgagee should have consulted the Articles of Association before executing the
mortgage deed

Doctrine of Indoor Management:


Its opposed to Constructive Notice.
The Articles of the company gives power to the director of company besides laying
down rules, regulations & procedure. The gives right to outsiders dealing with the
company are entitled to assume that so far as the internal proceedings of the
company are concerned, everything has been regularly done.
Every outsider is expected to know the Memo & Articles they need not inquire or
inspect about the regularity of the internal proceedings; they can presume that all is
being done regularly.
Royal British Bank vs Turquand Case:
The Directors of the company had issued a bond to T. They had the power under the
Articles to issue such a bond provided they were authorized by a resolution passed
by the shareholders at the General Meetings of the Company. No such resolution
was passed by the company.
Decision: T could recover the amount of the bond from the company on the ground

that he was entitled to assume that the resolution had been passed.

Director:
Since company is an artificial person and has neither a mind nor a body of its own,
it becomes necessary that company affairs should been entrusted to human agents,
called Directors. The Companies Act, 1956 defines a director as including any
person occupying the position of a director by whatever name called. Thus, it is
states that it is not the name by which a person is called Director but the position
he occupies, function and duties which he discharges that determine whether he is
director or not.
Also, he is the controller of the companys affairs who may also work as an
employee in different capacity.
The important point to note here is Director cannot be a corporate body, association
or a firm.

Qualification of Directors
The Act doesnt prescribe any academic or professional qualification for directors.
Also Act imposes no share qualification on the directors. But it shall be the duty of
every director who is required by the Articles of the Company to hold a specified
share qualification, within 2 months after his appointment as director. A director
may also become shareholder voluntarily.
Legal Position of Director
I.

As an Agent-: Company being artificial person, is governed by human


agency. Director as agent controls the affairs of the company. The ordinary
case of Principal- Agent is applicable to it. This means that acts of director on
behalf of or for company excludes directors from personal liability, provided
they are within the scope of their authority, or if shareholders ratify their acts,
if they are within the powers of the company.

II.

As a Trustee-: A trustee is the person in whom is vested the legal ownership


of assets which he administers for the benefit of another or others. Directors
are often referred to as the trustees of Companys money and property. They
must honestly act in the interest of the company or they may be called upon
to refund to the company any money or property, improperly and negligently
applied by them.

III.

As a Managing Director-: In some cases Directors being responsible of


companys affairs as other shareholders are virtually dormant. By virtue of

various provisions in the Memorandum and Articles, they enjoy vast powers
of management and act as the supreme policy and decision making body.

Are Directors employees of company?


It is observed that directors are elected representatives of the shareholders
engaged in directing affairs of the on its behalf. As such directors are agents of the
company but they are not employees or servants of the company. But, there is
nothing in law to prevent a director from accepting employment under the company
for which they have to enter a separate contract of service, in addition to
directorship; he is also treated as an employee or servant of the company. He shall
be entitled to remuneration and other benefits admissible to employees, in addition
to his remuneration as Director under the Act.

References:
Business Law: K.P. Bulchandani (Himalaya Publishing House)
Business Law: N. D. Kapoor. (Jainbookagency)
Indian Company Law: Avtar Singh (Eastern Book Company)
http://business.gov.in/starting_business/
http://indiankanoon.org/