NATURE AND KINDS OF COMPANIES

A company implies a voluntary association of

persons who provide money to run its business
and incorporate themselves into a distinct legal
entity.
Learning Objectives
 Company: Meaning and Defining Characteristics
 Company Distinguished from Partnership
 Public Company and Private Company
 Privileges & Exemptions of a Private Company
 Company deemed to be Public Company
 Conversion of Private Co. into Public Co.
 Conversion of Public Co. into Private Co.
 Limited and Unlimited companies; Section 25
companies
 Parent and Subsidiary Companies; Government
Companies
 Foreign companies
 Lifting the Corporate Veil
 DEFINING A COMPANY
A company is an association of many persons who contribute money
or monies worth to a common stock and employ in some trade or
business and who share the profit and loss arising there from. The
common stock so contributed is denoted in money and is the capital
of the company. The persons who contribute to it or to whom it
pertains are members. The proportion of capital to which each
member is entitled is his share. The shares are always transferable
albeit the right to transfer is often more or less
restricted. Lord Justice Lindley
A corporation is an artificial being, invisible, intangible, existing
only in contemplation of the law. Being a mere creation of law, it
possesses only the properties, which the Charter of its creation
confers upon it, either expressly or as incidental to its very
existence. Chief Justice Marshall
A company is an artificial person created by law, having separate
entity, with a perpetual succession and common seal.
Prof. Haney
 CHARACTERISTICS OF A COMPANY
The above definitions bring out the following distinct
features of a company, which together make it a unique
association and explain its nature.
1. Independent Legal Entity
2. Limited Liability
3. Everlasting Existence
4. Separate Property
5. Flexibility of Investment
6. Common Seal
7. Capacity to Sue and being Sued
8. Separation of Ownership and Management
9. Proportionate Representation
10. Right to Own Property Contd.
 ….CHARACTERISTICS OF A COMPANY
1. Independent Legal Entity . After being incorporated under
the Act a company becomes an independent legal entity, with an
existence separate from its members. It has its own name and
seal, its assets and liabilities are separate and distinct from those
of its members. It is capable of owning property, incurring debt,
borrowing money, having a bank account, employing people,
entering into contracts, and suing and being sued separately.
In Salomon vs Salomon & Co. Ltd., the House of Lords held: ‘The
company is at law a different person altogether from the
shareholders 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 received the profits,
the company is not in law the agent of the shareholders or
trustee for them. Nor are the shareholders, as members, liable in
any shape or form, except to the extent and in the manner
provided for by the Act.’
Accordingly Salomon’s claim – to be treated as secured and
preferential creditor – was held justified. Contd.
 ….CHARACTERISTICS OF A COMPANY
2. Limited Liability. The liability of the members of a company is
limited up to the face value of the shares held by them. A
member is liable to pay only the uncalled money due on the
shares held by him/her when called upon to pay and nothing
more, even if liabilities of the company far exceed its assets. In
contrast, partners of a firm have unlimited liability i.e., if the
assets of the firm are not adequate to pay the liabilities of the
firm, the creditors can force the partners to make good the
deficit from their personal assets.
3. Everlasting Existence . A company does not die or cease to
exist unless it is specifically wound up or the task for which it
was formed has been completed. Membership of a company may
keep on changing from time to time but that does not affect the
life of the company. Death or insolvency of members does not
have an effect on the subsistence of a company. Contd.
 ….CHARACTERISTICS OF A COMPANY
4. Separate Property . A company is a distinct legal entity.
The company’s property is its own. A shareholder cannot
claim to be the owner of the company's property during the
existence of the company. The Supreme Court of India has
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.
5. Flexibility of Investment . Shares in a company are freely
transferable. When a shareholder transfers his shares to
another person, the transferee steps into the shoes of the
transferor and acquires all the rights of the transferor in
respect of those shares. However, private companies can
restrict their members’ right to transfer shares. Contd.
 ….CHARACTERISTICS OF A COMPANY
6. Common Seal. A company, though a juristic person, does not have a
physical presence. Therefore, it acts through its Board of directors for
carrying out its activities and entering into various agreements. Such
contracts must be under the seal of the company. The common seal is a
seal used by a company as the symbol of its incorporation and acts as
the official signature of the company. The name of the company must
be engraved on the common seal. Any document not bearing the
common seal may not be accepted as authentic and hence may not
have any legal force.
7. Capacity to Sue and being Sued. A company can sue or be sued in its
own name as distinct from its members. Similarly, a company has every
right to enter into contractual obligations with other parties. However,
the Supreme Court of India has held in the case of State Trading
Corporation of India vs CTO that a company cannot have a status of a
citizen under the Constitution of India. Contd.
 ….CHARACTERISTICS OF A COMPANY
8. Separation of Ownership and Management . A company is
administered and managed by its managerial personnel i.e., the
Board of directors. The shareholders are simply the holders of
the shares in the company and need not necessarily be the
managers of the company.
9. Proportionate Representation . Proportional representation
implies ‘one share - one vote’ i.e., if a person has 10 shares, he has
10 votes in the company. This is in direct contrast to the voting
principle of a co-operative society where the ‘one member - one
vote’ principle applies.
10. Right to Own Property . Company is a distinct legal entity
and can own, transfer and manage property in its own way. The
company’s property is its personal. A member cannot claim to be
owner of the company’s property not only during the existence of
the company, in the event of its being wound-up too.
Differences Between Company and Partnership

S. Company Partnership
No.
1.
A partnership is governed by A company gets governed by the

the Indian Partnership Act. Companies Act.

2.
A partnership is sum total of A company represents a group of

persons who have come persons who have associated

together to share the profits of together for the attainment of a

the business carried on by all specific goal, business or

or any of them acting for all. otherwise.

Contd.
 …..Differences Between Company and Partnership
3. It is not a distinct legal entity. It enjoys a separate legal

existence independent of its

members.

4. Registration is not obligatory in Registration is obligatory.

case of partnership.

5. Liability of the partners is The liability of shareholders of a

unlimited. limited company is limited.

Contd.
…..Differences Between Company and Partnership

6. Property of the firm belongs to In case of a company, the

the partners and they are property belongs to the

collectively entitled to it. company and not to its

members.

7. A partner cannot transfer his In a company, shares may be

interest in the partnership firm transferred without the

without the consent of all other permission of other members

partners. unless contrary provisions exist

in the articles of the company.

Contd.
……Differences Between Company and Partnership
8. In case of partnership the number A public company may have as many

of members must not exceed ten members as it desires. A private

in case of banking business and company cannot have more than fifty

twenty in other businesses. members.

9. There must be at least two members The minimum number of members

in order to form a partnership firm. necessary for a public limited company is

seven and two for a private limited

company.

10. In case of a partnership, cent per cent In case of a company, decision of the

consent is required for any decision. majority members/ shareholders prevails.

 ILLEGAL ASSOCIATION

Under the Companies Act, 1956, not more than 10 persons can
come together for carrying on any banking business and not
more than 20 persons can come together for carrying on any
other type of business, unless the association is registered under
the Companies Act or any other Indian law. Any association,
which does not comply with the above norms, is an illegal
association. Therefore, a partnership of more than 10 or 20
members, as the case may be, is an illegal association unless
registered under the Companies Act or any other Indian law.
Exceptions. The above provision, however, does not apply in the
following cases:
1. Hindu joint family . A joint Hindu family business is
comprised of family members only. But where two or more
Hindu families come together for business through partnership,
though the total number of members cannot exceed 10 or 20, as
the case may be, but in computing the number, minor members
of such family will be barred. Contd.
…..ILLEGAL ASSOCIATION
2. Non-commercial association . Any association of
charitable, religious, or scientific trust which is not formed
with a profit motive.
3. Foreign companies. In a foreign company when the
number of members exceeds the prescribed maximum,
members must register it under the Companies Act or any
other Indian law in force.
Consequences of Illegal Association. Illegal association
is not recognised by law. It cannot enter into a contract, sue
any members or any outsider, and be sued by any members
or outsiders for any of its debts. The members of the illegal
association are personally liable for its obligations. Any
member of an illegal association cannot sue another
member in respect of any matter connected with the
association.
TYPES OF COMPANIES
Companies may be classified into the following
categories:
Public and Private companies
Limited and Unlimited companies
Section 25 companies
Parent and Subsidiary companies
Government companies
Foreign companies Contd.
….Types of Companies
1. Public Company . A public limited company is a company limited by
shares in which there is no restriction on the maximum number of
members, as well as on the transfer of shares and acceptance of public
deposits. The liability of each member is limited to the extent of the
unpaid amount of the face value of the shares and the premium
thereon in respect of the shares held by a member. The minimum
number of members is seven.
2. Private Company. A private company means a company which has a
minimum paid up capital of Rs one lakh or such higher paid-up capital
as may be prescribed and by its articles such as the following:
a. restricts the right to transfer its shares, if any;
b. limits the number of its members to 50, including:
i. persons who are in the employment of the company, and
ii. 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 their
employment ceased; and
c. prohibits invitation to the public to subscribe for any shares in or
debentures of, the company;
d. prohibits any invitation or acceptance of deposits from persons
other than its members, directors or their relatives. Contd.
Privileges and Exemptions of a Private Limited Company

1. Minimum number of its members is two.

2. Prohibition of allotment of the shares or debentures in certain cases unless
statement in lieu of prospectus has been delivered to the Registrar of Companies
does not apply.
3. A special resolution to issue shares to non-members is not required in case of a
private company. Restriction contained in Section 81 related to the rights issue of
share capital does not apply.
4. A private company does not need a separate certificate of commencement of
business. Restriction contained in Section 149 on commencement of business by a
company does not apply.
5. Provisions of Section 165 relating to statutory meeting and submission of
statutory report do not apply.
6. One (if seven or less members are present) or two members (if more than seven
members are present) present in person at a meeting of the company can demand
a poll.
7. In case of a private company which is not a subsidiary of a public limited
company, or in the case of a private company whose entire paid up share capital is
held by one or more corporate bodies, incorporated outside India, no person
other than the member of the company concerned shall be entitled to inspect or
obtain the copies of profit and loss account of that company.
8. Minimum number of directors is only two (three in case of a public company.
Private companies deemed to be public limited co.
A private company will be treated as a public limited company in any
of the following circumstances:
1. Where at least 25 per cent of the paid up share capital of a private
company is held by one or more bodies corporate, the private
company shall automatically become a public company on and from
the date on which the aforesaid percentage is so held.
2. Where the annual average turnover of the private company during
the period of three consecutive financial years exceeds Rs 25 crores,
the private company shall be, irrespective of its paid up share capital,
become a deemed public company.
3. Where not less than 25 per cent of the paid up capital of a public
company limited is held by the private company, the private
company shall become a public company from the date on which the
aforesaid percentage is so held.
4. Where a private company accepts deposits after the invitation is
made by advertisement or renews deposits from the public (other
than from its members or directors or their relatives), such
companies shall become public company on and from the date, such
acceptance or renewal is first made.
Conversion of a Private Company into Public Company
The conversion of a private company into a public company may be
discussed under the following two heads:
 Conversion by default
 Conversion by choice
Conversion by default (Section 43) . If a company commits a default
in compliance with the essential requirements of a private company as
laid down in Section 3 (1) (iii) of the Act i.e., it does not restrict transfer
of shares by its members; its membership exceeds 50; or gives
invitation to public to buy shares or debentures or to make deposits;
the company ceases to be entitled to the privileges and exemptions
conferred on private companies by or under this Act. Under these
circumstances, the Act shall apply to the company as if it were a public
and not a private company.
However, National Company Law Tribunal (NCLT ) may grant relief
from such consequences as aforesaid if it is satisfied that the failure to
comply with the conditions was accidental or due to inadvertence or to
some other sufficient cause. Contd.
….Conversion of a Private Company into Public Company

Conversion by choice (Section 44). If a private company alters it’s

Articles in such a manner that they no longer include the provisions
due to which it is categorized as a private company, the company shall
cease to be a private company. It shall then, within a period of thirty
days after the said date, file with the Registrar either a prospectus or a
statement in lieu of prospectus. Besides following formalities need to
be fulfilled for this purpose:
1. Passing a special resolution altering the Articles in this behalf and
filing a copy thereof with the Registrar of Companies within 30
days of passing the same.
2. Raising its membership to at least seven, if it is below that
number.
3. Raising the number of its permanent directors to at least three if
the same is below that number.
4. Raising its paid-up capital to minimum of Rs 5 lakhs if it is below
that amount.
After fulfilling the above requirements the private company becomes a
public company.
Conversion of a Public Company into a Private Company

Under the proviso to Section 31 (1) and (2A) to the Companies Act , all public
companies, whether originally incorporated as a public limited company or at
any time converted into a public limited company (under section 44 of the
Act), may be converted into a private limited company, if the members so
desire. The reasons for such conversion must, however, be just, convincing, and
sufficient. The company must not be listed on any recognised stock exchange.
In case of a listed company, it will have to wait for at least
one year after its delisting.
The company is supposed to track the following procedure for such a conversion:
I. Publish a newspaper notice in two widely circulated dailies of the state
where the Registered office of the company is situated and get a no
objection letter from the majority unsecured creditors and all
secured creditors.
II. Convene a Board meeting for consideration of the proposal of conversion of
the company into a private company and prepare the proposal for alteration
of Articles or prepare a new set of Articles of Association meeting the
requirements of a private limited company.
III. Hold the Board meeting and obtain approval of the Board for the
proposal, fix up the day, date and time of holding the general meeting of the
company, approve notice and explanatory
statement and authority to sign notice. Contd.
….Conversion of a Public Company into a Private Company
I. Hold the general meeting on the fixed day and pass a special resolution
authorizing the conversion and for alteration of Articles of Association for
incorporation of the definition of a private company. The Articles shall be
suitably amended to include the basic restrictions applicable on a private
company and other provisions necessary thereto.
II. Obtain the approval of the Central Government as required by Section 31.
Proviso to Section 31 (1) provides that no resolution amending the Articles,
which has the effect of converting a public company into a private company,
shall be effective unless it has been approved by the Central Government.
III. File a printed copy of the Articles as altered with the Registrar of Companies
within one month of the date of receipt of the approval
of the Central Government.
If satisfied with the above procedure, the Registrar of Companies
(ROC) will issue a letter granting its approval for the conversion of a public
company into a private company and eventually shall issue fresh certificates
of incorporation consequent upon change of name after conversion of the
company from 'Public Company' to 'Private Company‘.
Limited and Unlimited Companies
A company may be limited or unlimited
Limited company A limited company is one wherein the liability of its
members is limited and may further be sub-classified as limited by shares or by
guarantee as discussed below:
 Company limited by shares In this case, the liability of members is limited
to the extent of uncalled share capital. No member of company limited by the
shares can be called upon to pay more than the face value of shares or so much
of it as is remaining unpaid. Members have no liability in case of fully paid up
shares.
 Company limited by the guarantee A company limited by guarantee is a
registered company having the liability of its members limited by its
memorandum of association to such amount as the members may respectively
thereby undertake to pay if necessary on liquidation of the company. The
liability of the members to pay the guaranteed amount arises only when the
company has gone into liquidation and not when it is a going concern. A
guarantee company may be a company with share capital or without share
capital.
Unlimited company . The liability of members of an unlimited company is
unrestricted. Therefore their liability is similar to that of the liability of the
partners of a partnership firm. However, Companies Act does not permit the
formation of an unlimited company.
Section 25 Companies

As per the Companies Act, 1956, the name of a public limited

company must end with the word ‘Limited’ and the name of a
private limited company must end with the word ‘Private
Limited’. However, under Section 25, the Central Government
may allow certain companies to remove the word ‘Limited /
Private Limited’ from their names if the following conditions are
satisfied:
(i) The company is formed for promoting commerce , science,
art, religion, charity or other socially useful objects.
(ii) The company does not intend to pay dividend to its
members but apply its profits and other income in promotion of
its objectives.
The above companies are known as Section 25 companies.
Parent and Subsidiary Companies

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

(i) That other company controls the composition of its Board of
directors; or
(ii) That other company holds more than half in face value of its
equity share capital;
(iii) Where the first mentioned company is subsidiary company of
any company, which is the subsidiary of that other’s subsidiary. For
example, if company B is subsidiary of the company A and company C
is subsidiary of company B, therefore company C is also subsidiary of
company A.
The control of the composition of the Board of directors of the
company means that the parent company has the power, at its
discretion, to appoint or remove all or majority of directors of the
subsidiary company without consent or concurrence of any other
person.
Government Companies and Foreign Companies

Government Companies. Government company means any

company in which not less than 51 per cent of the paid up share
capital is held by the Central Government, or any state
government, 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. Government company is
also governed by the provisions of the Companies Act.
However, the Central Government may direct that certain
provisions of Companies Act shall not apply or shall apply only
with such exceptions, modifications and adaptations as may be
specified to such government companies.
Foreign Companies. Foreign Company means a company
incorporated in a country outside India under the law of that
other country and has established the place of business in India.
LIFTING THE CORPORATE VEIL

The doctrine of ‘corporate veil’ implies that a company has a separate

personality entirely different from that of its members. This signifies that
the company has a life of its own, can own property and deal with it the
way it desires, can sue and be sued in its own name, has a life and existence
of its own . No member can either individually or jointly claim any
ownership rights in the assets of the company during its continuance of
business or on its winding up. To facilitate all this, the Act has drawn a
thick veil (curtain) between the company and those who have formed or
run it. However, the separate personality of a company may create a range
of problems due to some unexpected and sometimes unwelcome effects. In
a number of circumstances, therefore, the Courts have disregarded the
Salomon principle as laid down by the House of Lords. Where the
corporate personality is being used unjustly or as a sham device, the Court
will ignore the cloak (legal fiction) to reach the person(s) under it or reveal
the true form and character of the concerned company. This is known as
corporate law concept of ‘lifting or piercing the corporate veil’., or
‘disregarding the corporate entity’. Contd.
…..LIFTING THE CORPORATE VEIL

Under this doctrine a stakeholder (shareholder or

director) of a company is held liable for the debts or
liabilities of the company despite the general principle
that shareholders are immune from suits in contract or
tort that otherwise would hold only the company
liable. The rationale behind this is probably that the law
will not allow the corporate firm to be misused or used for
the purposes which are not set out in the statute. The
circumstances in which the court may rip through the
corporate veil to expose its true character and nature may
broadly be classified under the following two heads:
 Under statutory intervention
 Under judicial interpretations Contd.
 Under Statutory Provisions

The Act through its express provisions may not allow the corporate
personality advantages in the following cases:
1. Reduction of number of members below the statutory minimum
[Section 45]. If at any time, the number of members of a company is
reduced below the statutory minimum (seven in the case of a public
company and two in the case of a private company), and the company
keeps on carrying its business beyond the six months, the privilege of
limited liability of shareholders is lost. The law pierces the corporate veil
and makes every person (who remains member with the company after
six months and is aware of that fact) jointly and severally liable for the
payment of debts, contracted during that time.
2. Misrepresentation in prospectus [Sections 62-63].Where a
prospectus includes any untrue statement, every director, promoter,
and every other person, who is a party to such prospectus shall be liable
to pay compensation to every person who subscribes for any shares or
debentures (on the faith of the prospectus) for any loss or damage he
may have sustained by reason or included therein the untrue statement.
Besides for any misrepresentation in the prospectus, every person who
authorised the issue of the prospectus shall be punishable with
imprisonment for a term which may extend to two years, or with fine
which may extend to fifty thousand rupees, or with both. Contd.
 ….Under Statutory Provisions
3. Failure to return application money [Section 69] . If minimum
subscription of 90 per cent is not received within 90 days from closure of the
issue, all monies received from applicants for shares shall be forthwith repaid
to them without interest. And if any such money is not so repaid within
seventy days of the closing of the issue, the directors of the company shall be
personally (jointly and severally) liable to repay that money with interest at the
rate of 15 per cent per annum from the expiry of the seventieth day.
4. Misdescription of the company’s name [Section 147] . The Act provides
that if any officer of the company or other person acting on its behalf or
authorizes to be signed on behalf of the company signs any bill of exchange,
promissory note, endorsement, cheque or order (draft) for money in which the
companies name is not mentioned in legible letters, the signatory director shall
be punishable with a fine which may extend to five thousand Indian rupees and
shall be personally liable to the holder of the bill of exchange, hundi,
promissory note, cheque or order for money or goods, for the amount thereof,
unless it is duly paid by the company. Contd.
….Under Statutory Provisions
5. For investigation of ownership of company [Section 247].
Under Section 247, where it appears to the Central Government
that there is good reason so to do, it may appoint one or more
inspectors to investigate and report on the membership of any
company and other matters relating to the company, for the
purpose of determining the true persons who are or have been
financially interested in the success or failure of the company;
or who are or have been able to control or materially influence
the policy of the company.
6. Fraudulent or wrongful trading [Section 542]. If in the course
of the winding up it appears that any business of the company
has been carried on with intent to defraud creditors of the
company or any other persons or for any fraudulent purpose, any
persons who were knowingly parties to the carrying on of the
business in that manner shall be personally responsible.
Under Judicial Interpretations
In the absence of express statutory provisions, the corporate veil
may also be lifted under judicial interpretations. Following are the
some of the circumstances that fall under this category:
1. Prevention of fraud or improper conduct . The courts have
been more than prepared to pierce the corporate veil when they
feel that a fraud is or could be perpetrated behind the veil. The
courts will not allow the Salomon principle to be used as an
engine of fraud.
2. Group enterprises . Sometimes in the case of group of
enterprises the Salomon principle may not be adhered to and the
court may lift the veil in order to look at the economic realities of
the group itself. In DHN Food Distributors Ltd. vs Tower
Hamlets it has been said that the courts may disregard Salomon's
case whenever it is just and equitable to do so. In the above-
mentioned case the court of appeal thought that the case in
question was one suitable for lifting the corporate veil. Here the
three subsidiary companies were treated as a part of the same
economic entity or group and were entitled to compensation.
Contd.
….Under Judicial Interpretations
3. Where a company acts as agency for its shareholders . In the case of Bodrip vs
Solomon7 , Justice Vaughan Williams expressed that the company was nothing but an
‘agent’ of Solomon. ‘That the business was Mr. Solomon's business and no one else's;
that he chose to employ as agent a limited company; that he is bound to indemnify
that agent, the company and that this agent, the company has lien on the assets.
However on appeal to the House of Lords it was held that a company did not
automatically become an agent of the shareholder even if it was a one man company
and the other shareholders were dummies. A company having power to act as an agent
may do so as an agent for its parent company or indeed for all or any of the individual
members if it or they authorize it to do so.
4. Trust . The courts may pierce the corporate veil to look at the characteristics of the
shareholders. In the case of The Abbey, Malvern Wells Ltd vs. Ministry of Local
Government and Planning, where all the shares in a company held by educational
trusts and the management of the company was in the hands of the trustees, the court
lifted the corporate veil so as to impress the company’s property within the terms of
the trusts. The veil of incorporation was pierced in order to look into the terms on
which the trustees held the shares.
5. Determination of enemy character. In times of war the court is prepared to lift the
corporate veil and determine the nature of shareholding as it did in the Daimler Co.
Ltd. vs. Continental Tyres & Rubber Co. case where Germen shareholders held the
shares of an English company during the World War I.
6. Tax considerations. At times tax legislations warrant the lifting of the corporate veil.
The courts are prepared to disregard the separate legal personality of companies in
case of tax evasions or liberal schemes of tax avoidance without any necessary
legislative authority.