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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.
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.
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.
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
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:
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.
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.
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:
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.
Public
Minimum members in
public company are 7 and
maximum unlimited.
Minimum paid up capital
five lac rupees.
Legal Control:
Loans:
Members:
Capital:
Transfer of shares:
Public Invitation:
Name:
Privileges:
Number of directors:
Restrictions on
appointment of
directors
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.
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.
Memorandum of Association:
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:
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
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.
II.
III.
various provisions in the Memorandum and Articles, they enjoy vast powers
of management and act as the supreme policy and decision making body.
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/