I. INTRODUCTION:
In primitive times, the word “company” meant “taking meals together. The word “com” means together and “panis” means bread. Merchants used to discuss business in these get-together events.[1] Initially, the term “company” lacked any technical and legal meaning.[2] A company once incorporated becomes a separate, distinct legal entity from that of its members. The members of a company own the advantage of having limited liability. The company possesses a common seal for its signatures after its incorporation.
Section 3 (1) (i) of the Companies Act 1956 defines a Company as “a company formed and registered under this Act or any existing company law. An existing company law means a company formed and registered under any of the previous company laws.”[3] Section 2 (20) of the Companies Act 2013 states the definition of the Company as “company means a company incorporated under this Act or any previous company law.”
II. The distinction between Company and other Associations
A company, as defined under the 1956 and 2013 Act, must have been formed and registered under any of the previous or recent Companies Act. Only those associations incorporated under the Act could be termed as a company. However, there are associations such as partnerships, unincorporated companies and co-operative societies which must be distinguished from a company incorporated under the Companies Act either previous or present.
III. Essential Features of a Company:
The essential features of an incorporated company are as follows:
1. A company is a distinct legal entity separate from its members. It can sue and can be sued as had been laid down in the famous case of Solomon v. Solomon Co. Ltd. A company consists of a heterogeneous association of members, unlike the Hindu Undivided Family (HUF) business where the members of a joint family are the members exclusively.[18]
2. The property of a company belongs to the company only and not to the members. Members could represent the company, but they do not own the property of the company.[19]
3. The creditors of a company could sue the company but cannot proceed against the assets of the individual members of the company, being restricted by the limited liability clause.[20]
4. A company is distinct from a partnership firm in a way that members of a company are not its agents, unlike the agents of a partnership firm. Therefore, a member of a company cannot just dispose of a company’s property and incur the liabilities even if he is acting while conducting his business.[21]
5. A member being the shareholder of a company could make a contract with the company.
6. The shares of a company could be transferred even without the consent of the other shareholders.
7. Any restrictions in the power of any members of a company mentioned in the Articles of Association (AOA) of a company shall also prevail against the public as AOA is a public document.[22]
8. The liability of a shareholder of a company is either limited by share or by guarantee.
9. A company is a distinct legal entity which could only be dissolved by following the proper legal procedure of liquidation so prescribed by the 2013 Act.
10. A company has perpetual succession, i.e., the death or insolvency of the shareholders of a company shall not affect the life of the company. The provision of perpetual succession has been mentioned under Section 9 of the 2013 Act.[23]
11. There are no restrictions or limitations as to the maximum number of members of a company except in case of the private companies which have got a maximum limit of fifty members, including the past and the present employees.
12. In a company, the rights, and duties of the management vests on the directors only and the rest of the members do not participate in the management affairs directly.[24]
13. A company is legally bound to have its accounts audited annually by a Chartered Accountant. It is mandatory for an incorporated company.
IV. Different Kinds of Companies:
A company could be of different types based on its nature of business and the purpose of incorporation.
1. Incorporated Company:
An incorporated company may be defined as an association of persons who are willing to contribute a fixed sum into common stock and employ it for a common purpose. The common stock so contributed becomes the capital of the company. The persons contributing to the common stock becomes members of the company. The proportion of the capital to which each member has contributed to the common stock becomes their shares.[4] Under the common law definition, a company is a legal person which is separate from that of its members and could survive even after the lives of its members.[5]
2. Joint Stock Company:
In the famous case of Dormouth Cottege v. Woodward, the Supreme Court of USA had defined the joint-stock company as “an artificial person- invisible, intangible and existing only in the eyes of the law.”[6] A joint-stock company possesses only those characteristics which the Charter, that creates the company confers on it. It is the product of law.
3. Private Companies:
Section 2(68) of the Companies Act 2013 defines a private company as a company having a minimum paid-up share capital of one lakh rupees or more. Private companies having restrictions in inviting capital from the public, it is not much involved in the affairs of public interest. A private company having share capital must have the restriction clause mentioned in its AOA for transfer of shares.[7]
However, private companies are exempted from filing prospectus or statements. These companies could start allotting shares irrespective of the number of shares subscribed. The provision of minimum subscription so mentioned under Section 39 of 2013 Act does not apply in case of the private companies.[8] A private company is free to issue any shares and is not entitled to limit voting rights to its shareholders. It could have a minimum of two directors, as mentioned under Section 149 (a) of 2013 Act. There is a minimum requirement of 2 members to form a private company. However, the membership shall not exceed two hundred.
4. Public Companies:
Section 2 (71) of the Companies Act 2013 defines a public company as a company which is not private, and which has a minimum paid-up capital of 5 lakh rupees or such higher paid-up capital as may be prescribed. The shares and debentures of a public company are listed with a stock exchange and offered for sale to the public. There is a minimum requirement of 7 members to form a public company. However, there are no limits for the maximum number of members. In the famous case of Shyam Nandan Prasad v. the State of Bihar, the Supreme Court held that a Co-operative housing society registered under the Bihar and Orissa Co-operative Societies Act is a public company as the paid-up capital of the company is not subscribed to by the Government and the member numbers exceed fifty.[9]
For a public company, there are no restrictions on the transfer of shares. It could call for shares and debentures in the market to invite the public to invest in share capital. A public company must have at least three directors. Suppose a public company has a share capital and it has not issued any prospectus. In that case, it must file a statement to the Registrar instead of the prospectus. The statement shall be signed by all the directors whose names shall be mentioned in the same.[10] A public company cannot commence its business unless the Registrar of Companies issues a certificate to start business under Section 149 of the 2013 Act.
5. Holding and Subsidiary Company:
Section 2 (46) of the Companies Act, 2013 explains the concept of holding and subsidiary company. A company shall become the subsidiary of another company if that other company controls the composition of its Board of Directors; holds more than 50% of the nominal value of its equity share capital or more than 50% of the total voting power of the company, or it is itself the subsidiary of another company which is again a subsidiary of some other company. One of the disadvantages of this arrangement is that a subsidiary company cannot hold shares in a holding company, and any allotment of shares to a subsidiary company shall become void.[11]
6. Government Companies:
Section 2(45) of the Companies Act 2013 explains Government Company. A company in which not less than 51% of the paid-up share capital is held by the Central Government or by any State Government or partly by the Central Government and partly by one or more State Government or includes a company which is subsidiary to Government could be termed as the Government Company. The Supreme Court of India in the case of Pyarelal Sharma v. Managing Director, J.& K. Industries Ltd., held that a Government Company is not an agent of the Government. Hence, the employees could not be termed as civil servants.[12]
7. Foreign Companies:
Section 2 (42) of the Companies Act 2013 mentions about the foreign companies. Foreign company means any company or body corporate incorporated outside India which has a place of business in India whether by itself or through an agent or electronic mode; conducts any other business activity in India in any different manner. A foreign company cannot be sued in India for a cause of action which has arisen outside India even if it has a place of business in India.[13]
Section 376 of the 2013 Act states that if a foreign company ceases to carry on its business in India, it could be wounded up in accordance to the provision mentioned under Section 375 of the same Act for the unlisted companies, even though the company has been dissolved or ceased to exist as a company in accordance to the laws of that definite foreign country in which it was incorporated.[14]
8. Multinational Companies (MNCs):
The companies or corporations managing the productions and deliverance of services in more than one country are called the multinational companies or corporations. They are also known as international corporations or companies. MNCs are the corporations holding a head office for management affairs in one country known as the home country and operates in several other countries known as the host countries.[15] The two central international bodies, i.e., The International Monetary Fund (IMF) and World Bank help in regulating the foreign exchange; increasing and boosting global co-operation in terms of the trade and commerce and promoting healthy and fair competition strategies globally among the MNCs.
9. Charitable Companies:
Section 8 of the 2013 Act states that if the Central Government is satisfied with the fact that a company has been formed to promote commerce, arts, science, religion, charity or any other useful object and such company prohibits the payment of any dividend to its members and instead utilizes its profits and additional income for promoting its objectives; the Central Government could grant a license to such company to change its name by passing a special resolution to include or omit the word “limited” or “private limited.”
10. Finance Companies:
Section 45 (1) (c) of the Reserve Bank of India Act, 1934, states that a finance company could be termed as a non-banking company which is mainly a financial institution carrying on following kinds of business. Such as:
- The acquisition of stocks, shares, debentures, or securities issued by the Government or by any local authorities.
- Financing either by making loans or advances.
- Delivery of any goods to a hirer or letting goods under the Hire Purchase Act, 1972.
- Conducting any class of insurance business.
- Conducting, supervising, or managing any chits or lotteries agencies under the law in force.[16]
11. FERA Companies:
The companies operating in India under the Foreign Exchange and Regulation Act, 1973 are called the FERA Companies. The FERA companies are of following types:
- Foreign controlled companies- Indian companies which are having more than 40% non-resident interest.
- Indian companies that are having no foreign interest or having less than 40 % foreign interest.
- Foreign incorporated companies registered in India to conduct business.[17]
12. Companies Regulated by Special Acts:
The companies constituted and regulated by the Banking Companies Act, 1949; Food Corporation Act, 1964; Electricity (Supply) Act, 1948 and other Special Acts shall have to be registered and incorporated under the Companies Act 2013. The provisions of the 2013 Act shall also apply to them so far the conditions are consistent with the provisions of the Special Acts and are not in conflict with the same.
V. CONCLUSION:
The benefit of an incorporated company is many folds, including the legal ones. An incorporation not only makes a company an independent legal entity having rights and liabilities separate from its members but also provides the privilege of limited liability to its members. The principle of limited liability states that the liability of a member in the event of winding up of the company would not be more than the unpaid value of the share held by him. Such a principle of an incorporated company attracts maximum investors—the shares of a registered company being transferable help in raising maximum capital within a minimum time.
The advantage of a centrally focused management of a company by its directors promotes the independent functioning of the management, which in turn attracts talented professionals to work in a liberated atmosphere. Such work culture helps in accomplishing the highest target of productivity and efficient management, which leads to the overall growth and development of a company. Therefore, the features, structures and benefits of an incorporated company are mainly conducive to contemporary trade as this could facilitate the free flow of business, thereby contributing to healthy and fair market competition.
[1] Palmer: Company Secretarial Practice, p.1.
[2] Buckley, J., In re Stanley (1906) I Ch 131 (134).
[3] Section 3(1)(i) – The Companies Act,1956.
[4] Lord Lindley on Companies, p.1.
[5] Graf Evans: What is a Company? (1910) 26 LQR 259.
[6] 4 Wheat [US] 518
[7] Hyderabad Sind Electric Supply Co. v. Union of India, AIR 1959 Punj. 199.
[8] Gower: Principles of Modern Company Law, 4th Edn. p. 136.
[9] (1993) 4 SCC 255 (263).
[10] Life Insurance Corporation v. Escorts Ltd., (1968) 1 SCC 264.
[11] Praga Tools Corporation v. Inamuel, AIR 1969 SC 1306.
[12] (1990) 67 Comp. Cas. 195 (SC).
[13] Barle & Means: The Modern Corporation And Private Property (1932) p. 282.
[14] Avtar Singh: Company Law (1991 Ed.) p.8.
[15] Palmer: Private Companies (1961 Ed.) p. 19.
[16] Pratap Singh v. Bank of America, (1976) 46 Comp. Cas. 532 (Bom.)
[17] P. Johnson v. Astrofiel Annadom, (1989) 3 Comp. LJ 5 (Ker)
[18] Dayal Singh v. Des Raj, AIR 1964 Punj. 72.
[19] Kuenigl v. Donnersmarck, (1955) 1 AII ER 46.
[20] G. Narayanswamy: Complexities, Cumbersomeness and Anomalies of the Company Law, (1966) 2 Comp. L.J. 20.
[21] Tata Engineering Company v. State of Bihar, AIR 1965 SC 40.
[22] Benett Coleman & Co. v. Union of India, AIR 1973 SC 106.
[23] Section 9 – The Companies Act, 2013.
[24] Hendon v. Adelman (1973) New LJ 637.
This Article is Authored by Amrapali Mukherjee, LL.M Student at Queen Mary University of London.
