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.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.2
It was observed in Stanley, Re3 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 non1 Palmer : Company Secretarial Practice, p.1.
2 Shah, S.M. : Lectures On Company Law, (13 th Ed.) p.1.
3 [1906] 1 Ch. 131

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.
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.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.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 CompanyThe 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,6 defined company as an association of many persons 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.
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.8
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

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.
8 What is Company? (1910) 26 LQR 259

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.9
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.

9 Dormouth Cottege v. Woodward 4 Wheat [US] 518

3. History of Company Legislation in IndiaThe 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, 1960,10 which affected 218
sections, and many new provisions were added which were not the part of the
principal Act.
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.
10 Came in to force on 28th December, 1960.

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, 196611 removed the errors in Section 370
relating to loans to be made by companies to other companies under the same
management.
The Companies (Amendment) Act, 196612 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.
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
11 (34 of 1966)
12 (37 of 1966)

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.13
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.14
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.
13 Section 58-A of the amended act
14 Section 205-A and 205-B of the amended Act

 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.15
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, 197716 amended seven sections including
Sections 10-E, 58-A, 108-H, 220, 620 and 635 and added section 634-A. Now a
15 Section 383-A.
16 Act 46 of 1977

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.

The Companies (Amendment) Act, 1985 brought some changes. The Section 293A 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.17
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.18
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
17 Vide Section 28 of the Companies (Amendment) Act, 200
18 Vide amendment in sections 275, 276 & 277.

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 egovernance 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 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: 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 1 st 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.

19 (18 of 2013)

 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.20
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 introduced21 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.
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
20 Section 96(1)
21 Section 135

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.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.
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.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

22 Section 310
23 Section 455

prescribed manner for obtaining a status of dormant company. The

Registrar shall maintain a register of Dormant Companies.

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(ii)

operative societies; and

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.24 It is, however, significant to note that though a corporation
24 Sengupta, B.K. : Company Law (1990) p. 2.

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.
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.25
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:25 Board of Trustees, Ayurvedic & Unani Tibia College v. Delhi Administration, AIR
1962 SC 458

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.26
In re Kondoli Tea Co. Ltd.,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.
The Supreme Court in M/s. Electronics Corporation of India Ltd. v.
Secretary, Revenue Dept., Government of Andhra Pradesh,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.

(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
26 Praga Tools Corporation v. Imanual, AIR 1969 SC 1306
27 (1886) ILR 13 Cal. 43.
28 AIR 1999 SC 1734.

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.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, Bombay30. 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.31
It was held in Gramophone & Typewriter Ltd. v. Stanley,32 that, the property
of the company is not the property of the shareholders; it is the property of
the company.
(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.33 The transfer of shares of a
company does not in any way affect its existence or management and the

30 AIR 1955 SC 74
31 Palmer : Private Companies (1961 Ed.) p. 19
32 (1906) 2 KB 856 (869)
33 Barle & Means : The Modern Corporation And Private Property (1932) p. 282

shareholder can conveniently get relieved of his liability by transferring his

shares to some other person.
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.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 (2 nd 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.35
The High Court of Calcutta in Gopalpur Tea Co. Ltd. V. Penhok Tea Co.
Ltd.,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.
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
35 Gower : Modern Company Law (2nd Ed.) p. 75.
36 (1982) 52 Comp. Cas. 238

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. 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. 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.
(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
38 Section 4(1)(d)(i)

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.39 Accordingly, such a company may purchase its own shares or
advance monies to any person to purchase its shares.
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 Companies
We 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;

39 Section 67 of the Companies Act, 2013

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

(iii)

employment ceased,
shall not be included in the number of members; and
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.40
40 Edward Manson, The Evolution of the Private Company, (1910) 26 LQR 11

Younger LJ observed in Commr of Indian Revenue v, Sansom41 that private

companies exist with the sanction and encouragement of the legislature.
It was held in Vikas Jalan v. Nucon Industries (P) Ltd,42 that Private Companies are
legal entities as much as public companies. They cannot be called a property of the
Joint Hindu Family.
(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,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
41 (1921) 2 KB 492
42 (2001) 103 Comp Cas 343 AP
43 (1993) 4 SCC 255 (263)

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.
(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 44
either at its own or together with one or more of its subsidiary
companies.
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,

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)].

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.