CU-BCOM-SEM-IV-Company Law & Secretarial Practice-Second Draft

BACHELOR OF COMMERCE SEMESTER IV COMPANY LAW AND SECRETARIAL PRACTICE

CHANDIGARH UNIVERSITY Institute of Distance and Online Learning SLM Development Committee Prof. (Dr.) H.B. Raghvendra Vice- Chancellor, Chandigarh University, Gharuan, Punjab:Chairperson Prof. (Dr.) S.S. Sehgal Registrar Prof. (Dr.) B. Priestly Shan Dean of Academic Affairs Dr. Nitya Prakash Director – IDOL Dr. Gurpreet Singh Associate Director –IDOL Advisors& Members of CIQA –IDOL Prof. (Dr.) Bharat Bhushan, Director – IGNOU Prof. (Dr.) Majulika Srivastava, Director – CIQA, IGNOU Editorial Committee Prof. (Dr) Nilesh Arora Dr. Ashita Chadha University School of Business University Institute of Liberal Arts Dr. Inderpreet Kaur Prof. Manish University Institute of Teacher Training & University Institute of Tourism & Hotel Management Research Dr. Manisha Malhotra Dr. Nitin Pathak University Institute of Computing University School of Business © No part of this publication should be reproduced, stored in a retrieval system, or transmitted in any formor by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the authors and the publisher. SLM SPECIALLY PREPARED FOR CU IDOL STUDENTS 2 CU IDOL SELF LEARNING MATERIAL (SLM)

First Published in 2021 All rights reserved. No Part of this book may be reproduced or transmitted, in any form or by any means, without permission in writing from Chandigarh University. Any person who does any unauthorized act in relation to this book may be liable to criminal prosecution and civil claims for damages. This book is meant for educational and learning purpose. The authors of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event the Authors has/ have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action. 3 CU IDOL SELF LEARNING MATERIAL (SLM)

CONTENTS Unit 1 – Introduction............................................................................................................. 5 Unit 2 – Kinds Of Companies ............................................................................................. 22 Unit 3 – Classification I....................................................................................................... 34 Unit 4 – Classification II ..................................................................................................... 43 Unit 5 – Formation.............................................................................................................. 54 Unit 6 – Memorandum Of Association ................................................................................ 68 Unit 7 - Articles Of Association .......................................................................................... 77 Unit 8 - Prospectus.............................................................................................................. 89 Unit 9 – Share Capital ....................................................................................................... 100 Unit 10 – Share Allotment................................................................................................. 122 Unit 11 – Company Management I.................................................................................... 133 Unit 12 – Company Management II .................................................................................. 147 Unit 13 – Meetings............................................................................................................ 168 Unit 14 – Winding Up ....................................................................................................... 192 4 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 1 – INTRODUCTION STRUCTURE 1.0 Learning Objectives 1.1 Introduction 1.2 History and development of company law in India 1.3 Concept paper on company law, 2004 & J.J Irani report 1.4 Meaning and definition of a company 1.5 Nature and characteristics of a company 1.6 Summary 1.7 Keywords 1.8 Learning Activity 1.9 Unit End questions 1.10 References 1.0 LEARNING OBJECTIVES After studying this unit, the student will be able to , • The concept and legal provisions of company law. • Appreciate the background and evolution of corporate legislation in India. • Analyse the distinct features of company. • Learn the important definitions related to companies. 1.1 INTRODUCTION Company Law in India is the cherished child of the English parents. Our various Companies Acts have been modelled on the English Acts. Following the enactment of the Joint Stock Companies Act, 1844 in England, the first Companies Act was passed in India in 1850. The Indian Companies Act, 1866, the Indian Companies Act, 1882, the Companies Act, 1913, and the Companies Act, 1956 was earlier law passed in India. Every Companies Act introduced new concepts. Like, before Amending Act of 1857 there was not concept of limited liability which is now a fundamental concept of the companies law. 5 CU IDOL SELF LEARNING MATERIAL (SLM)

1.2 HISTORY AND DEVELOPMENT OF COMPANY LAW IN INDIA The Companies Act, 1956 – Based on Bhaba Committee Recommendations At the end of 1950, the Government of independent India appointed a Committee under the Chairmanship of H.C. Bhaba to go into the entire question of the revision of the Indian Companies Act, 1913. 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. The Companies Act, 1956 had undergone changes by amendments in 1960, 1962, 1963, 1964, 1965, 1966, 1967, 1969, 1971, 1977, 1985, 1988, 1996, 1999, 2000, 2002 and 2006. 6 CU IDOL SELF LEARNING MATERIAL (SLM)

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1.3 CONCEPT PAPER ON COMPANY LAW, 2004 & J.J. IRANI REPORT To frame a law that enables companies to achieve global competitiveness in a fast-changing economy, the Government had taken up a fresh exercise for a comprehensive revision of the Companies Act, 1956, albeit through a consultative process. As the first step in this direction, a Concept Paper on Company Law drawn up in the legislative format was exposed for public viewing on the electronic media so that all interested parties may not only express their opinions on the concepts involved but may also suggest formulations on various aspects of Company Law. The response to the concept paper on Company Law was tremendous. The Government, therefore, felt it appropriate that the proposals contained in the Concept Paper and suggestions received thereon be put to merited evaluation by an independent Expert Committee. A Committee was constituted on 2nd December, 2004 under the Chairmanship of Dr. J JIrani, the then Director, Tata Sons, with the task of advising the Government on the proposed revisions to the Companies Act, 1956 with the objective to have a simplified compact law that will be able to address the changes taking place in the national and international scenario, enable the adoption of internationally accepted best practices as well as provide adequate flexibility for timely evolution of new arrangements in response to the 9 CU IDOL SELF LEARNING MATERIAL (SLM)

requirements of ever-changing business models. The Committee submitted its report to the Government on 31st May 2005. Dr. J JIrani Expert Committee on Company Law had submitted its report charting out the road map for a flexible, dynamic and user-friendly new company law. The Committee had taken a pragmatic approach keeping in view the ground realities and had sought to address the concerns of all the stakeholders to enable adoption of internationally accepted best practices. As one wades through the report, one finds an arduous zeal to ensure that flexibility is coupled with accountability and transparency. Be it the role of directors in the management of the company or the role of promoters at the time of incorporation or the responsibility of professionals in ensuring better governance, the report had made very dynamic and balanced recommendations. The Report of the Committee had also sought to bring in multifarious progressive and visionary concepts and endeavoured to recommend a significant shift from the “Government Approval Regime” to a “Shareholder Approval and Disclosure Regime”. The Expert Committee had recommended that private and small companies need to be given flexibilities and freedom of operations and compliance at a low cost. Companies with higher public interest should be subject to a stricter regime of Corporate Governance. Further, Government companies and public financial institutions should be subject to similar parameters with respect to disclosures and Corporate Governance as other companies are subjected to. To attune the Indian Company Law with the global reforms taking place in the arena, the Report of the Committee had sought to bring in multifarious visionary concepts, which if accepted and acted upon would really simplify the voluminous and cumbersome Companies Act in the country. Companies Act, 2013 The Companies Act, 2013 received the assent of the President on August 29, 2013, and was notified in the Gazette of India on 30.08.2013. The Companies Act, 2013 has undergone amendments four times so far. The Companies (Amendment) Act, 2015, The Insolvency and Bankruptcy Code, 2016, The Companies (Amendment) Act, 2017, and The Companies (Amendment) Act, 2019 amended The Companies Act, 2013. So far Ministry has come out with several circulars, notifications, Orders and various amendment rules to facilitate better and smooth implementation of the Act. The Companies Act 2013 introduced new concepts supporting enhanced disclosure, accountability, better board governance, better facilitation of business and so on. It includes associate company, one Person Company, small company, dormant company, independent director, women director, resident director, special court, secretarial standards, secretarial audit, class action, registered valuers, rotation of auditors, vigil mechanism, corporate social responsibility, E-voting etc. 10 CU IDOL SELF LEARNING MATERIAL (SLM)

Reading Methodology of the Companies Act, 2013 and its legal aura The Companies Act, 2013 is not a standalone piece of legislation but a complete ecosystem. It contains Orders, Rules, Notifications and Circulars. One should read each section of the Act, with relevant Rule, Notification and Circular. The Act is a superior authority in law passed by the Legislature. Notifications and Rules are notified by the Executive under the powers derived from the Act itself. The Central Government has issued Removal of Difficulties Orders under Section 470 within first 5 years of the existence of the Companies Act, 2013. This is like a small amendments just to remove difficulties due to interpretation and practical implementation of the large intent of the law, without impacting the large intent. Notifications under Section 460 exempt certain companies from the applicable provision of the Act. At the time of reading a Section mentioned under an Exemption Notification dealing with a certain class of companies, one must read such Section in respect of that class of companies as amended by the Exemption Notification for that class. Exemption notifications effectively amend these Sections for the purpose of the class of companies with which the Exemption Notification deals. The Central Government may amend schedules of the Act using power given under Section 467. Schedules must be read with the main Section. Wherever a Section of the Companies Act, 2013 use words “as may be prescribed” it is an indication the Legislature has delegated powers to the Executive on that particular point. Section 469 empowers the Central Government to make rules for Sections which do not delegate such powers to the Central Government. While provisions of the Act along with Removal of Difficulties Orders (RoDs), Exemption Notifications and Schedules, deals with the policy framework of the law; rules deals with the procedures. Rules cannot change policy framework in any manner and cannot override substantial provision of the Section empowering the Rules. The Circulars are issued by the Department interpreting a particular provision of the Act or the Rule in certain circumstances. The Companies Act, 2013 does not empower the Department to issue circular. This whole ecosystem is called the Companies Law and should be read collectively and comprehensive. 1.4 MEANING AND DEFINITION OF A COMPANY The word ‘company’ is derived from the Latin word (Com=with or together; panis =bread), and it originally referred to an association of persons who took their meals together. In the leisurely past, merchants took advantage of festive gatherings, to discuss business matters. Nowadays, the company form of organization has assumed great importance. When they 11 CU IDOL SELF LEARNING MATERIAL (SLM)

forms their business relations they form a company. In popular parlance, a company or firm denotes an association of likeminded persons formed for the purpose of carrying on some business or undertaking. A company under law is a corporate body and a legal person having status and personality distinct and separate from the members constituting it. It is called a body corporate because the persons composing it are made into one body by incorporating it according to the law and clothing it with legal personality. The word ‘corporation’ is derived from the Latin term ‘corpus’ which means ‘body’. Accordingly, ‘corporation’ is a legal person created by a process other than natural birth. As a legal person, a corporate is capable of enjoying many rights and incurring many liabilities of a natural person. An incorporated company owes its existence either to a Special Act of Parliament or to company law. Public corporations like Life Insurance Corporation of India, SBI etc., have been brought into existence through special Acts of Parliament, whereas companies like Tata Steel Ltd., Reliance Industries Limited have been formed under the Company law i.e., Companies Act, 1956 which is replaced by the Companies Act, 2013. In the legal sense, a company is an association of both natural and artificial persons and is incorporated under the existing law of a country. In terms of the Companies Act, 2013 (Act No. 18 of 2013) a “company” means a company incorporated under this Act or under any previous company law [Section 2(20)]. In common law, a company is a “legal person” or “legal entity” separate from, and capable of surviving beyond the lives of its members. A company is rather a legal device for the attainment of social and economic end. It is, therefore, a combined political, social, economic and legal institution. Thus, the term company has been described in many ways. “It is a means of cooperation and organisation in the conduct of an enterprise”. It is “an intricate, centralised, economic and administrative structure run by professional managers who hire capital from the investor(s)”. Lord Justice Lindley has defined a company as “an association of many persons who contribute money or money’s worth to a common stock and employ it in some trade or business and who share the profit and loss arising therefrom. The common stock so contributed is denoted in money and is the capital of the company. The persons who contributed in it or form it, or to whom it belongs, are members. The proportion of capital stock to which each member has contributed entitled is his “share”. The shares are always transferable although the right to transfer them may be restricted.” 1.5 NATURE AND CHARACTERISTICS OF A COMPANY Since a corporate body (i.e. a company) is the creation of law, it is not a human being, it is an artificial juridical person (i.e. created by law) and it is clothed with many rights, obligations, powers and duties prescribed by law. 12 CU IDOL SELF LEARNING MATERIAL (SLM)

The most striking characteristics of a company are discussed below: (i) Corporate personality A company incorporated under the Act is vested with a corporate personality so it bears its own name, acts under name, may has a seal of its own and its assets are separate and distinct from those of its members. It is a different ‘person’ from the members who compose it. Therefore it is capable of owning property, incurring debts, borrowing money, having a bank account, employing people, entering into contracts and suing or being sued in the same manner as an individual. Its shareholders are its notional owners and do not own anything in it except ownership of shares issued and they can be its creditors simultaneously. A shareholder cannot be held liable for the acts of the company even if he holds virtually the entire share capital. The shareholders are not the agents of the company and so they cannot bind it by their acts. The company does not hold its property as an agent or trustee for its members and they cannot sue to enforce its rights, nor can they be sued in respect of its liabilities. Thus, ‘incorporation’ is the act of forming a legal corporation as a juristic person. A juristic person is in law also conferred with rights and obligations and is dealt in accordance with law. In other words, the entity acts like a natural person but only through a designated person, whose acts are processed within the ambit of law [Shiromani Gurdwara Prabandhak Committee v. Shri Sam Nath Dass AIR 2000 SCW 139]. (ii) Company as an artificial person A Company is an artificial person created by law. It is not a human being, but it acts through human beings. It is considered as a legal person who can enter into contracts, possess properties in its own name, sue and can be sued by others etc. It is called an artificial person since it is invisible, intangible, existing only in the contemplation of law. It is capable of enjoying rights and being subject to duties (iii) Company is not a citizen The company, though a legal person, is not a citizen under the Citizenship Act, 1955 or the Constitution of India. In State Trading Corporation of India Ltd. v. C.T.O., A.I.R. 1963 S.C. 1811, the Supreme Court held that the State Trading Corporation though a legal person, was not a citizen and can act only through natural persons. Nevertheless, it is to be noted that certain fundamental rights enshrined in the Constitution for protection of “person”, e.g., right to equality (Article 14) etc. are also available to company. Section 2(f) of Citizenship Act, 1955 expressly excludes a company or association or body of individuals from citizenship. (iv) Company has Nationality and Residence Though it is established through judicial decisions that a company cannot be a citizen, yet it has nationality, domicile and residence. In Gasque v. Inland Revenue Commissioners, (1940) 2 K.B. 88, Macnaghten. J. held that a limited company is capable of having a domicile and its 13 CU IDOL SELF LEARNING MATERIAL (SLM)

domicile is the place of its registration and that domicile clings to it throughout its existence. He observed in this case: “It was suggested that a body corporate has no domicile. It is quite true that a body corporate cannot have a domicile in the same sense as an individual. But by analogy with a natural person the attributes of residence, domicile and nationality can be given to a body corporate. (v) Limited Liability “The privilege of limited liability for business debts is one of the principal advantages of doing business under the corporate form of organisation.” The company, being a separate person, is the owner of its assets and bound by its liabilities. The liability of a member as shareholder, extends to the contribution to the capital of the company up to the nominal value of the shares held and not paid by him. Members, even as a whole, are neither the owners of the company’s undertakings, nor liable for its debts. In other words, a shareholder is liable to pay the balance, if any, due on the shares held by him, when called upon to pay and nothing more, even if the liabilities of the company far exceed its assets. This means that the liability of a member is limited. For example, if A holds shares of the total nominal value of 1,000 and has already paid Rs.500/- (or 50% of the value) as part payment at the time of allotment, he cannot be called upon to pay more than Rs. 500/-, the amount remaining unpaid on his shares. If he holds fully paid shares, he has no further liability to pay even if the company is declared insolvent. In the case of a company limited by guarantee, the liability of members is limited to a specified amount of the guarantee mentioned in the memorandum. Buckley, J. in Re. London and Globe Finance Corporation, (1903) 1 Ch.D. 728 at 731, has observed: ‘The statutes relating to limited liability have probably done more than any legislation of the last fifty years to further the commercial prosperity of the country. They have, to the advantage of the investor as well as of the public, allowed and encouraged aggregation of small sums into large capitals which have been employed in undertakings of “great public utility largely increasing the wealth of the country”. Exceptions to the principle of limited liability • Members are severally liable in certain cases- if at any time the number of members of a company is reduced, in the case of a public company, below seven, in the case of a private company, below two, and the company carries on business for more than six months while the number of members is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is cognisant of the fact that it is carrying on business with less than seven members or two members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefor.[Section 3A] • When the company is incorporated as an Unlimited Company under Section 3(2)(c) of the Act l Where a company has been got incorporated by furnishing any false or 14 CU IDOL SELF LEARNING MATERIAL (SLM)

incorrect information or representation or by suppressing any material fact or information in any of the documents or declaration filed or made for incorporating such company or by any fraudulent action, the Tribunal may, on an application made to it, on being satisfied that the situation so warrants, direct that liability of the members of such company shall be unlimited. [Section 7(7)(b)] • Further under section 339(1), where in the course of winding up it appears that any business of the company has been carried on with an intent to defraud creditors of the company or any other persons or for any fraudulent purpose, the Tribunal may declare the persons who were knowingly parties to the carrying on of the business in the manner aforesaid as personally liable, without limitation of liability, for all or any of the debts/liabilities of the company.[Section 339] • Under Section 35(3), where it is proved that a prospectus has been issued with intent to defraud the applicants for the securities of a company or any other person or for any fraudulent purpose, every person who was a director at the time of issue of the prospectus or has been named as a director in the prospectus or every person who has authorised the issue of prospectus or every promoter or a person referred to as an expert in the prospectus shall be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by any person who subscribed to the securities on the basis of such prospectus. • As per section 75(1), where a company fails to repay the deposit or part thereof or any interest thereon referred to in section 74 within the time specified or such further time as may be allowed by the Tribunal and it is proved that the deposits had been accepted with intent to defraud the depositors or for any fraudulent purpose, every officer of the company who was responsible for the acceptance of such deposit shall, without prejudice to other liabilities, also be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by the depositors. • Section 224(5) states that where the report made by an inspector states that fraud has taken place in a company and due to such fraud any director, key managerial personnel, other officer of the company or any other person or entity, has taken undue advantage or benefit, whether in the form of any asset, property or cash or in any other manner, the Central Government may file an application before the Tribunal for appropriate orders with regard to disgorgement of such asset, property, or cash, and also for holding such director, key managerial personnel, officer or other person liable personally without any limitation of liability. (vi) Perpetual Succession An incorporated company never dies, except when it is wound up as per law. A company, being a separate legal person is unaffected by death or departure of any member and it remains the same entity, despite total change in the membership. Perpetual succession means 15 CU IDOL SELF LEARNING MATERIAL (SLM)

that the membership of a company may keep changing from time to time, but that shall not affect its continuity. The membership of an incorporated company may change either because one shareholder has sold/transferred his shares to another or his shares devolve on his legal representatives on his death, or he ceases to be a member under some other provisions of the Companies Act. Thus, perpetual succession denotes the ability of a company to maintain its existence by the succession of new individuals who step into the shoes of those who cease to be members of the company. Professor L.C.B. Gower rightly mentions, “Members may come and go, but the company can go on forever. During the war all the members of one private company, while in general meeting, were killed by a bomb, but the company survived — not even a hydrogen bomb could have destroyed it”. (vii) Separate Property A company being a legal person and entirely distinct from its members, is capable of owning, enjoying and disposing of property in its own name. The company is the real person in which all its property is vested, and by which it is controlled, managed and disposed off. Their Lordships of the Madras High Court in R.F. Perumal v. H. John Deavin, A.I.R. 1960 Mad. 43 held that “no member can claim himself to be the owner of the company’s property during its existence or in its winding-up”. A member does not even have an insurable interest in the property of the company. (viii) Transferability of Shares The capital of a company is divided into parts, called shares. The shares are said to be movable property and subject to certain conditions, freely transferable, so that no shareholder is permanently or necessarily wedded to a company. When the joint stock companies were established, the object was that their shares should be capable of being easily transferred. Section 44 of the Companies Act, 2013 enunciates the principle by providing that the shares held by the members are movable property and can be transferred from one person to another in the manner provided by the articles. If the articles do not provide anything for the transfer of shares and the Regulations contained in Table “F” in Schedule I to the Companies Act, 2013, are also expressly excluded, the transfer of shares will be governed by the general law relating to transfer of movable property. A member may sell his shares in the open market and realise the money invested by him. This provides liquidity to a member (as he can freely sell his shares) and ensures stability to the company (as the member is not withdrawing his money from the company). The Stock Exchanges provide adequate facilities for the sale and purchase of shares. Further, as of now, in most of the listed companies, the shares are also transferable through Electronic mode i.e., through Depository Participants in dematerialised form instead of physical transfers. 16 CU IDOL SELF LEARNING MATERIAL (SLM)

However, there are restrictions with respect to transferability of shares of a Private Limited Company. Even if share of a Private Limited Company is in demat form, restrictions by the Articles of the company shall apply. (ix) 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 the company are to be instituted in its name. Similarly, the company may bring an action against anyone in its own name. A company’s right to sue arises when some loss is caused to the company, i.e. to the property or the personality of the company. Hence, the company is entitled to sue for damages in libel or slander as the case may be [Floating Services Ltd. v. MV San FranscecoDipaloa (2004) 52 SCL 762 (Guj)]. A company, as a person distinct from its members, may even sue one of its own members. A company has a right to seek damages where a defamatory material published about it, affects its business. Where video cassettes were prepared by the workmen of a company showing, their struggle against the company’s management, it was held to be not actionable unless shown that the contents of the cassette would be defamatory. The court did not restrain the exhibition of the cassette. [TVS Employees Federation v. TVS and Sons Ltd., (1996) 87 Com Cases 37]. The company is not liable for contempt committed by its officer. [LalitSurajmalKanodia v. Office Tiger Database Systems India (P) Ltd., (2006) 129 Com Cases 192 Mad]. (x) Contractual Rights A company, being a legal entity different from its members, can enter into contracts for the conduct of the business in its own name. A shareholder cannot enforce a contract made by his company; he is neither a party to the contract, nor be entitled to the benefit derived from of it, as a company is not a trustee for its shareholders. Likewise, a shareholder cannot be sued on contracts made by his company. The distinction between a company and its members is not confined to the rules of privity but permeates the whole law of contract. Thus, if a director fails to disclose a breach of his duties towards his company, and in consequence a shareholder is induced to enter into a contract with the director on behalf of the company which he would not have entered into had there been disclosure, the shareholder cannot rescind the contract. Similarly, a member of a company cannot sue in respect of torts committed against the company, nor can he be sued for torts committed by the company. Therefore, the company as a legal person can take action to enforce its legal rights or be sued for breach of its legal duties. Its rights and duties are distinct from those of its constituent members. (xi) Limitation of Action 17 CU IDOL SELF LEARNING MATERIAL (SLM)

A company cannot go beyond the power stated in its Memorandum of Association. The Memorandum of Association of the 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 its 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 such powers unless the Memorandum of Association, itself altered prior to doing so. (xii) Separate Management As already noted, the members may derive profits without being burdened with the management of the company. They do not have effective and intimate control over its working and they elect their representatives as Directors on the Board of Directors of the company to conduct corporate functions through managerial personnel employed by them. In other words, the company is administered and managed by its managerial personnel. (xiii) Voluntary Association for Profit A company is a voluntary association for profit. It is formed for the accomplishment of some stated goals and whatsoever profit is gained is divided among its shareholders or saved for the future expansion of the company. Only a Section 8 company can be formed with no profit motive. (xiv) Termination of Existence A company, being an artificial juridical 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 adopt strategies like reorganisation, reconstruction and amalgamation. To sum up, “a company is a voluntary association for profit with capital divisible into transferable shares with limited liability, having a distinct corporate entity and a common seal with perpetual succession”. 1.6 SUMMARY  The word ‘company’ is derived from the Latin word (Com = with or together; pan is = bread), and it originally referred to an association of persons who took their meals together.  The main characteristics of a company are corporate personality, limited liability, perpetual succession, separate property, transferability of shares, capacity to sue and be sued, contractual rights, limitation of action, separate management, termination of existence etc 18 CU IDOL SELF LEARNING MATERIAL (SLM)

 The company, though a legal person, is not a citizen under the Citizenship Act, 1955 or the Constitution of India. Though it has established through judicial decisions that a company cannot be a citizen, yet it has nationality, domicile and residence.  In India after independence, the Companies Act, 1956 was enacted with a view to consolidate and amend the earlier laws relating to companies and certain other associations. 1.7 KEYWORDS  Bill - A bill is proposed legislation under consideration by a legislature. A bill does not become law until it is passed by the legislature. Once a bill has been enacted into law, it is called an act of the legislature, or a statute.  Jurisprudence - The study of law and the principles on which law is based  Ordinance - Ordinances are temporary laws that are promulgated by the President of India on the recommendation of the Union Cabinet. Article 123 of Constitution of India provide for power of President to promulgate Ordinances during recess of Parliament. They enable the government to take immediate legislative action. Ordinances cease to operate either if Parliament does not approve of them within six weeks of reassembly, or if disapproving resolutions are passed by both Houses. It is also compulsory for a session of Parliament to be held within six months of passing an ordinance. 1.8 LEARNING ACTIVITY 1. Four persons are the only members of a private company. All of them go for a pleasure trip in a car and due to an accident, all the four die. Does the private company exist? ___________________________________________________________________________ ___________________________________________________________________________ 2. The members of a private limited company consist of ‘A’ and ‘B’ who are also its directors. On 4th August 2019 ‘A’ left India for a foreign business tour and on 28th August 2019 he died abroad. On 1st September 2019 ‘B’ purchased on credit of Rs. 10,000 worth of goods from ‘C’ on behalf of the company. ‘C’ now proposes to make ‘B’ personally liable for the payment of the debt. Is ‘B’ liable? ___________________________________________________________________________ ___________________________________________________________________________ 1.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 19 CU IDOL SELF LEARNING MATERIAL (SLM)

1. Write short note on Perpetual succession. 2. What is meant by limited liability od shares. 3. A company being an artificial person cannot own property and cannot sue or be sued. Comment 4. A company is a juristic legal person. Comment. 5. What is meant by transferability of shares? Long Questions 1. What are the characteristics of a company? 2. What is meant by corporate personality? 3. Members are the owners of the company’s undertaking. Comment. 4. Discuss about the history of companies act in our country. 5. What is a one person company? Discuss. B. Multiple Choice Questions 1. A not for profit organisation can be formed under ______ of Companies Act 2013 a. Section 8 b. Section 25 c. Section 2 d. None of these 2. When a Shareholder of a company dies, his legal heirs become shareholders through______ a. Transfer b. Transmission c. Will d. None of these 3.An incorporated company never dies, except when it is wound up as per law. This is through a process called as ________________ a. Separate legal entity b. Perpetual succession c. Transmission 20 CU IDOL SELF LEARNING MATERIAL (SLM)

d. None of these 4.A shareholder of a limited company has personal liability to the extent of ____________ a. Liability of the company on the date of winding up b. Liability of the company on the date of Liquidation c. Unpaid value of shares if any d. None of these 5.Which of the following is not a feature of a company? a. Separate legal existence b. Residential status c. Perpetual succession d. Citizenship Answers 1-a, 2-b, 3-b, 4-c, 5-d 1.10 REFERENCES Textbooks/ReferenceBooks  T1 Kapoor, N.D.; Elements of Company Law; Himalayan Publishing House, Mumbai.T2Kuchhal, M.C. :Company Law Avtar Singh,Company Law, EasternBookCompany,Lucknow  R1 PathakAkhileshwarGarg, Chawla, Sareen, Mercantile Law, Kalyani Publication,NewDelhi.SecuritiesContracts(Regulation)Act,1956  R2SinghAvtar:CompanyLaw; EasternBookCo.,Lucknow. 21 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 2 – KINDS OF COMPANIES STRUCTURE 2.0 Learning objectives 2.1 Introduction 2.2 Distinction between company and partnership 2.3 Distinction between company and LLP 2.4 Distinction between company and HUF 2.5 Distinction between company and club 2.6 Distinction between company and corporation 2.7 Lifting or piercing the corporate veil 2.8 Kinds of Companies 2.9 Private company 2.10 Public company 2.11 Distinction between private and public company 2.12 Summary 2.13 Keywords 2.14 Learning activity 2.15 Unit end questions 2.16 References 2.0 LEARNING OBJECTIVES After studying this unit, the student will be able to  Understand the importance of company form of organisation  Differentiate between various forms of companies  Analyse the concept of lifting of corporate veil  Appreciate the difference between public and private company 2.1 INTRODUCTION Though there are a number of similarities between a limited company and other forms of associations, there are many dissimilarities. In both the cases individuals are the subjects, and 22 CU IDOL SELF LEARNING MATERIAL (SLM)

trading is generally the object. In the following paragraphs a limited company is distinguished from a partnership firm, a Hindu Joint Family business, a club and a registered society. 2.2 DISTINCTION BETWEEN COMPANY AND PARTNERSHIP The principal points of distinction between a company and a partnership firm, are as follows: 1. A company is a distinct legal person. A partnership firm is not distinct from the several persons who compose it. 2. In a partnership, the property of the firm is the property of the individuals comprising it. In a company, it belongs to the company and not to the individuals comprising it. 3. Creditors of a partnership firm are creditors of individual partners and a decree against the firm can be executed against the partners jointly and severally. The creditors of a company can proceed only against the company and not against its members. 4. Partners are the agents of the firm, but members of a company are not its agents. A partner can dispose of the property and incur liabilities as long as he acts in the course of the firm’s business. A member of a company has no such power. 5. A partner cannot contract with his firm, whereas a member of a company can. 6. A partner cannot transfer his share and make the transferee a member of the firm without the consent of the other partners, whereas a company’s share can ordinarily be transferred. 7. Restrictions on a partner’s authority contained in the partnership contract do not bind outsiders; whereas such restrictions incorporated in the Articles are effective, because the public are bound to acquaint themselves with them. 8. A partner’s liability is always unlimited whereas that of shareholder may be limited either by shares or a guarantee. 9. A company has perpetual succession, i.e. the death or insolvency of a shareholder or all of them does not affect the life of the company, whereas the death or insolvency of a partner dissolves the firm, unless otherwise provided. 10. A company may have any number of members except in the case of a private company which cannot have more than 200 members (excluding past and present employee members). In a public company there must not be less than seven persons and in a private company not less than two. Further, a new concept of one person company has been introduced which may be incorporated with only one person. 11. A company is legally required to have its accounts audited annually by a chartered accountant, whereas the accounts of a firm are audited at the discretion of the partners. 23 CU IDOL SELF LEARNING MATERIAL (SLM)

12. A company, being a creation of law, can only be dissolved as laid down by law. A partnership firm, on the other hand, is the result of an agreement and can be dissolved at any time by agreement. 2.3 DISTINCTION BETWEEN COMPANY AND LIMITED LIABILITY PARTNERSHIP (LLP) LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership. LLP can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its own name. LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP. Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct. Mutual rights and duties of the partners within a LLP are governed by an agreement between the partners or between the partners and the LLP as the case may be. The LLP, however, is not relieved of the liability for its other obligations as a separate entity. Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is called a hybrid between a company and a partnership. LLP is a body corporate, and a legal entity separate from its partners, having perpetual succession. LLP form is a form of business model which :(i) is organized and operates on the basis of an agreement.(ii) provides flexibility without imposing detailed legal and procedural requirements (iii) enables professional/technical expertise and initiative to combine with financial risk taking capacity in an innovative and efficient manner. A basic difference between an LLP and a company lies in that the internal governance structure of a company is regulated by statute (i.e. Companies Act) whereas for an LLP it would be by a contractual agreement between partners. The management-ownership divide inherent in a company is not there in a limited liability partnership. LLP have more flexibility as compared to a company. LLP have lesser compliance requirements as compared to a company. 2.4 DISTINCTION BETWEEN COMPANY AND HINDU JOINT FAMILY BUSINESS 1. A company consists of heterogeneous members, whereas a Hindu Undivided Family Business consists of homogenous members since it consists of members of the joint family itself. 24 CU IDOL SELF LEARNING MATERIAL (SLM)

2. In a Hindu Joint Family business the Karta (manager) has the sole authority to contract debts for the purpose of the business, other coparceners cannot do so. There is no such system in a company. 3. A person becomes a member of Joint Hindu Family business by virtue of birth. There is no provision to that effect in the company. 4. No registration is compulsory for carrying on business for gain by a Hindu Joint Family even if the number of members exceeds twenty [Shyamlal Roy v. Madhusudan Roy, AIR 1959 Cal. 380 (385)]. Registration of a company is compulsory. 2.5 DISTINCTION BETWEEN A COMPANY AND A CLUB 1. A company is a trading association. A club, on the other hand, is a non-trading association. 2. Registration of a company is compulsory. Registration of a club is not compulsory. 2.6 DISTINCTION BETWEEN A COMPANY AND A CORPORATION Generally speaking, an association of persons incorporated according to the relevant law and clothed with legal personality separate from the persons constituting it is known as a corporation. The word ‘corporation’ or words ‘body corporate’ is/are both used in the Companies Act, 2013. Definition of the same which is reproduced below is contained in Clause (11) of Section 2 of the Act: “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-operative societies; and (ii) any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf. A society registered under the Societies Registration Act has been held by the Supreme Court in Board of Trustees v. State of Delhi, A.I.R. 1962 S.C. 458, not to come within the term ‘body corporate’ under the Companies Act, though it is a legal person capable of holding property and becoming a member of a company. 2.7 LIFTING OR PIERCING THE CORPORATE VEIL Law has clothed a corporation with a distinct personality, yet in reality it is an association of persons who are in fact, in a way, the beneficial owners of the property of the body corporate. A company, being an artificial person, cannot act on its own, it can act only through natural persons. 25 CU IDOL SELF LEARNING MATERIAL (SLM)

Indeed, the theory of corporate entity is still the basic principle on which the whole law of corporations is based. But as the separate personality of the company is a statutory privilege, it must be used for legitimate business purposes only. Where a fraudulent and dishonest use is made of the legal entity, the individuals concerned will not be allowed to take shelter behind the corporate personality. The Court will break through the corporate shell and apply the principle of what is known as “lifting of or piercing through the corporate veil”. The Court will look behind the corporate entity and take action as though no entity separates from the members existed and make the members or the controlling persons liable for debts and obligations of the company. The corporate veil is lifted when in defence proceedings, such as for the evasion of tax, an entity relies on its corporate personality as a shield to cover its wrong doings. [BSN (UK) Ltd. v. Janardan Mohandas Rajan Pillai [1996] 86 Comp. Cas. 371 (Bom).] In the following cases the Courts have lifted the corporate veil: 1. Where the corporate veil has been used for commission of fraud or improper conduct, Courts have lifted the veil and looked at the realities of the situation. In Gilford Motor Co. v. Horne, (1933) 1 Ch. 935, a former employee of a company made a covenant not to solicit its customers. He formed a company which undertook solicitation. The company was restrained by the Court. 2. Where the corporation is really an agency or trust for some one else and the corporate facade is used to cover up that agency or trust. In re R.G. Films Ltd., (1953) 1 All E.R. 615, an American company produced a film in India technically in the name of a British Company, 90% of whose capital was held by the President of the American Company which financed the production of the film. Board of Trade refused to register the film as a British film on the ground that English company acted merely as the nominee of the American corporation. 3. Where the doctrine conflicts with public policy, Courts have lifted the corporate veil for protecting the public policy. In Connors Bros. v. Connors (1940) 4 All E.R. 179, the principle was applied against the managing director who made use of his position contrary to public policy. In this case, the House of Lords determined the character of the company as “enemy” company, since the persons who were de facto in control of its affairs, were residents of Germany, which was at war with England at that time. The alien company was not allowed to proceed with the action, as that would have meant giving money to the enemy, which was considered as monstrous and against “public policy”. 4. For determining the true character or status of the company. In Daimler Co. Ltd. v. Continental Tyre and Rubber Co., (1916) 2 A.C. 307, the Court looked behind the facade of the company and its place of registration in order to determine the true character of the company, i.e., whether it was an “enemy” company. 26 CU IDOL SELF LEARNING MATERIAL (SLM)

5. Where the veil has been used for evasion of taxes and duties, the Court upheld the piercing of the veil to look at the real transaction. (Commissioner of Income Tax v. Meenakshi Mills Ltd., A.I.R. (1967) S.C. 819). 6. Where it was found that the sole purpose for which the company was formed was to evade taxes the Court will ignore the concept of separate entity and make the individuals liable to pay the taxes which they would have paid but for the formation of the company. In the case of Sir Dinshaw Manakjee Petit, AIR 1927 Bombay 371, the assessee was a wealthy man enjoying large dividend and interest income. He formed four private companies and agreed with each to hold a block of investment as an agent for it. Income received was credited in the accounts of the company, but the company handed back the amount to him as a pretended loan. This way he divided his income in four parts in a bid to reduce his tax liability. The Court disregarded the corporate entity on the grounds that the company was formed by the assessee purely and simply as a means of avoiding tax and the company was nothing more than the assessee himself. 7. Where the purpose of company formation was to avoid welfare legislation. Where it was found that the sole purpose for the formation of the new company was to use it as a device to reduce the amount to be paid by way of bonus to workmen, the Supreme Court upheld the piercing of the veil to look at the real transaction (The Workmen Employed in Associated Rubber Industries Limited, Bhavnagar v. The Associated Rubber Industries Ltd., Bhavnagar and another, A.I.R. 1986 SC 1). 2.8 KINDS OF COMPANIES The Companies Act, 2013 provides for a variety of companies of which can be promoted and registered under the Act. These companies may be: (i) limited by shares. (ii) limited by guarantee; or (iii) unlimited companies. Companies may also be classified as: (a) Private Companies. (b) Public Companies. (c) One Person Company (d) Company with charitable objects, etc. under Section 8 of the Companies Act, 2013. (e) Small Company (f) Government companies. (g) Foreign companies. 27 CU IDOL SELF LEARNING MATERIAL (SLM)

(h) Holding companies; and (i) Subsidiary companies. (j) Producer Companies. A brief discussion of each type of company follows hereunder. A Company Limited by Shares A company limited by shares may be defined as a “registered company” whether public or private company having the liability of its members limited by its memorandum to the amount, if any, unpaid on the shares respectively held by them. In other words, a member of a company limited by shares is required to pay only the nominal amount of shares held by him and nothing more. If the shares are fully paid-up, he has nothing more to pay. A Company Limited by Guarantee A company limited by guarantee is a registered company having the liability of its members limited by its memorandum to such an amount as the members may respectively undertake by the memorandum to contribute to the assets of the company in the event of its being wound up. A special feature of this type of company is that the liability of members to pay their guarantee amount arises only when the company goes into liquidation and not when it is a going concern. Clubs, trade associations and societies for promoting different objects are at times incorporated as companies limited by Guarantee to take the advantages of incorporation without running the risk of heavy liabilities. An Unlimited Company An unlimited company is a company not having any limit on the liability of its members. Thus, the maximum liability of the members of such a company, in the event of its being wound up, might stretch up to the full extent of their properties to meet the obligations of the company by contributing to its assets. However, the members of an unlimited company are not liable directly to the creditors of the company, as in the case of partners of a firm. The liability of the members is only towards the company and in the event of its being wound up only the liquidator can ask the members to contribute to the assets of the company which will be used in discharging the debts of the company. A company registered as an unlimited company may subsequently convert itself as a limited company, subject to the condition that any debts, liabilities, obligations or contracts incurred or entered into, by or on behalf of the unlimited company before such conversion are not affected by such changed registration. 28 CU IDOL SELF LEARNING MATERIAL (SLM)

2.9 PRIVATE COMPANY [SECTION 2(68)] By virtue of Section 2(68) of Companies Act, 2013 “private company” means a company having a minimum paid up share capital as may be prescribed, and which by its articles, – (i) restricts the right to transfer its shares. (ii) except in case of One Person Company, limits the number of its members to two hundred: 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 employment ceased shall not be included in the number of members; and (iii) prohibits any invitation to the public to subscribe for any securities of the company. Maximum number of members that a private company can have is 200. There should be at least two persons to form a private company. A private company can therefore be registered with a minimum of 2 members and cannot have more than 200 members (excluding employee and ex-employee members). It cannot invite the public to subscribe for its shares or debentures nor can its shares be freely transferred. The words “Private Limited” must be added at the end of its name by a private limited company. The Companies (Amendment) Act, 2015, had removed the requirement of minimum paid up capital for private companies. This means that a company can be incorporated with such capital as may be decided by the promoters while incorporating the company. 2.10 PUBLIC COMPANY [SECTION 2(71)] “Public company” means a company which – (a) is not a private company. (b) has a minimum paid-up share 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 public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles. It is clarified the status of a private company which is a subsidiary of a public company by providing specifically in the proviso that such company shall be deemed to be public company irrespective of its status as private company in its articles. 29 CU IDOL SELF LEARNING MATERIAL (SLM)

The Companies (Amendment) Act, 2015, had removed the requirement of minimum paid up capital for public companies. This means that a company can be incorporated with such capital as may be decided by the promoters while incorporating the company 2.11 DISTINCTION BETWEEN A PUBLIC AND A PRIVATE COMPANY 1. Minimum number: The minimum number of persons required to form a public company is 7. It is 2 in case of a private company. 2. Maximum number: There is no restriction on maximum number of members in a public company, whereas the maximum number cannot exceed 200 in a private company. 3. Number of directors: A public company must have at least 3 directors, whereas a private company must have at least 2 directors. 5. Restriction on invitation to subscribe for shares: A public company invites the general public to subscribe for the shares in, or the debentures of the company. A private company by its Articles prohibits any such invitation to the public. 6. Transferability of shares: In a public company, the shares are freely transferable. In a private company the right to transfer shares is restricted by the Articles. 7. Special privileges: A private company enjoys some special privileges. A public company enjoys no such privileges. 2.12 SUMMARY  Company is referred to an association of persons who took their meals together. A company may be an incorporated company or a “corporation” or an unincorporated company. It is called a body corporate because the persons composing it are made into one body by incorporating it according to the law, and clothing it with legal personality, and so turn it into a corporation.  The main characteristics of a company are as follow o • Corporate Personality o • Limited Liability o • Perpetual Succession o • Transferability of Shares o • Separate Property o • Capacity to Sue and Be Sued  Company is a distinguished form of business as compared to other forms.  The companies are regulated under Companies Act 2013.  The Companies Act, 2013 provides for a variety of companies of which can be promoted and registered under the Act. 30 CU IDOL SELF LEARNING MATERIAL (SLM)

o These companies may be: o • limited by shares. o • limited by guarantee; or o • unlimited companies. 2.13 KEYWORDS • Corporate Personality - The distinct status of a business organization that has complied with law for its recognition as a legal entity and that has an independent legal existence from that of its officers, directors, and shareholders. • Limited Liability - Type of investment in which a partner or investor cannot lose more than the amount invested. The investor or partner is not personally responsible for the debts and obligations of the company in the event that these are not fulfilled. • Perpetual Succession - Continuation of an incorporated firm’s existence, unaffected by the death of any of its owners or the transfer of its shares to a new entity. • Common Seal - A metal stamp for stamping the impression of a company’s official signature on documents with the name of the company to show that they have been approved officially • Foreign Company- 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 • Government Company- Any company in which not less than fifty-one per cent. of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary company of such a Government company. • One Person Company - A company which has only one person as a member. 2.14 LEARNING ACTIVITY 1. Four persons are the only members of a private company. All of them go for a pleasure trip in a car and due to an accident all the four die. Does the private company exist? ___________________________________________________________________________ ___________________________________________________________________________ 2. A Private Company has 210 members in total of which 10 are the employees of the company. 5 of these employees leave the employment of the company ___________________________________________________________________________ ___________________________________________________________________________ 31 CU IDOL SELF LEARNING MATERIAL (SLM)

2.15 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What do you mean by lifting of corporate veil? 2. What is a foreign company? 3. What is meant by common seal? 4. Define public company 5. Define private company Long Questions 1. Distinguish between a public and private company 2. Discuss the importance of lifting of corporate veil. 3. How does a company differ from a body corporate. 4. Differentiate company from a partnership firm. 5. Discuss about one person company. B. Multiple Choice Questions 1. Maximum number of members under a private company as provided under the Companies Act, 2013. a. 50 b. 150 c. 200 d. No limit 2. Document that regulates the management of internal affairs of a company are- a. Memorandum of Association b. Prospectus c. Article of Association d. Certificate of incorporation 3.Under the Companies Act, 2013, “Significant influence” constitutes how much % of total share capital or of business decisions under an agreement? a. At least 2% 32 CU IDOL SELF LEARNING MATERIAL (SLM)

b. At least 2.5% c. At least 10% d. At least 20% 4.A Private Company which is subsidiary of a Public Company is treated as- a. Public Company b. Private Company c. Holding Company d. Dormant Company 5. Which one of the following is not the content of the Memorandum of Association? a. Name clause b. Registered office clause c. Objects clause d. Board of Directors clause Answers 1-c, 2-c, 3-d, 4-a, 5-d 2.16 REFERENCES Textbooks/ReferenceBooks  T1 Kapoor, N.D.; Elements of Company Law; Himalayan Publishing House, Mumbai.T2Kuchhal, M.C. :Company Law Avtar Singh,Company Law, EasternBook Company,Lucknow  R1 Pathak Akhileshwar Garg, Chawla, Sareen, Mercantile Law, Kalyani Publication,NewDelhi. SecuritiesContracts(Regulation)Act,1956  R2SinghAvtar:CompanyLaw; EasternBookCo.,Lucknow. 33 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 3 – CLASSIFICATION I STRUCTURE 3.0 Learning objective 3.1 Introduction 3.2 On the basis of liability 3.3 On the basis of Number of members 3.4 On the basis of control 3.5 On the basis of Listing of shares 3.6 On the basis of government control 3.7 Other types of companies 3.8 On the basis of Incorporation 3.9 Summary 3.10 Keywords 3.11 Learning activity 3.12 Unit end Questions 3.13 References 3.0 LEARNING OBJECTIVES After studying this unit, the student will be able to  Understand the various categories in companies  Differentiate between public and private companies  Analyse why there are various categories of companies  Appreciate the importance of Section 8 companies and OPC 3.1 INTRODUCTION Companies are of various types. The companies are classified under various categories like  On the basis of liability  On the basis of number of members  On the basis of control  On the basis of listing of shares  On the basis of government control and 34 CU IDOL SELF LEARNING MATERIAL (SLM)

 Other types All these categories are discussed under. 3.2 ON THE BASIS OF LIABILITY The companies are classified according to their liabilities into the following- • Company limited by shares. • Company limited by guarantees. • Unlimited companies. Company limited by share Section 2(22) defines ‘company limited by share’ as a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them. Company limited by guarantee Section 2(21) defines ‘company limited by guarantee’ as a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up. Unlimited Company Section 2(92) defines ‘unlimited company’ as a company not having any limit on the liability of its members. 3.3 ON THE BASIS OF NUMBER OF MEMBERS The companies are classified on the basis of number of members as- • Public companies. • Private companies. Public Company Section 2(71) defines ‘public company’ as a company which is not a private company. A company which is a subsidiary of a company, not being a private company, shall be deemed to public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles. Private Company Section 2(68) defines ‘private company’ as a company having a minimum paid up share capital as may be prescribed and company which by its articles- (i) restricts the right to transfer its shares. 35 CU IDOL SELF LEARNING MATERIAL (SLM)

(ii) except in case of One Person Company, limits the number of its members to 200. (iii) prohibits any invitation to the public to subscribe for any securities of the company. Where two or more persons hold one or more share in a company jointly, they shall, for the purposes of this clause treated as a single member. The following shall not be included in the number of members- • persons who are in the employment of the company; and • 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 employment ceased. 3.4 ON THE BASIS OF CONTROL The companies are classified on the basis of control as- • holding company. • subsidiary company. Holding Company As per Section 2(46) ‘holding company’ in relation to one or more other companies, means a body corporate of which such companies are subsidiary companies. Subsidiary Company Section 2(87) defines ‘subsidiary company’ in relation to any other body corporate as 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 voting power. 3.5 ON THE BASIS OF LISTING OF SHARES The public limited companies are eligible for listing its shares on the stock exchanges. On this basis, the public limited companies are classified as- • listed company. • unlisted company. Listed Company Section 2(52) defines ‘listed company’ as a company which has any of its securities listed on any recognised stock exchange. Unlisted company 36 CU IDOL SELF LEARNING MATERIAL (SLM)

A public company which is not listed its shares on any stock exchange is called a non-listed company. 3.6 ON THE BASIS OF GOVERNMENT CONTROL The companies are classified on the basis of the control of the Government over the company as- • Government company. • Non-Government company. Government Company Section 2(45) defines ‘Government Company’ as any 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 Governments, or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary company of such a Government company. Non-Government company A company in which either of the Government has no paid-up share capital is called as the non-Government company. 3.7 OTHER TYPES OF COMPANIES The other types of companies are as follows- • Associate Company. • Banking company. • Foreign company. • One-personcompany. • Small company. • Section 8 company. • Dormant company. • Inactive company. • Producer company. • Investment company; and • Statutory company. Associate Company 37 CU IDOL SELF LEARNING MATERIAL (SLM)

Section 2(6) of the Act defines the term ‘Associate Company’ in relation to another company, a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence. It includes a joint venture company. The explanation to this section defines the term ‘significant influence’ as control of at least 20% of total share capital or of business decisions under an agreement. Banking Company Section 2(9) defines the term ‘banking company’ as a banking company defined in Section 5(c) of Banking Regulation Act, 1949. Foreign Company Section 2(42) defines ‘foreign company’ as 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. One Person Company Section 2(62) defines ‘One Person Company’ as a company which has only one person as a member. It is also considered as a private company. Small Company Section 2(85) defines ‘small company’ as a company, other than a public company- (i) paid up share capital of which does not exceed `50 lakh rupees or such higher amount as may be prescribed which shall not be more than `10 crore; and (ii) turnover of which is as per its profit and loss account for the immediately preceding Financial Year does not exceed `2 crores or such higher amount as may be prescribed which shall not be more than `100 crores. This definition shall not apply to- • a holding company or a subsidiary company. • a company registered under Section 8; or • a company or body corporate governed by any special Act. Section 8 company Such type of company is to be registered with Registrar of Companies and also to obtain licence from the Central Government. If a person or association of person proposed to be registered under the Companies Act, 2013 as a limited company- • has its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object. 38 CU IDOL SELF LEARNING MATERIAL (SLM)

• intends to apply its profits, if any, or other income in promoting its objects; and • intends to prohibit the payment of any dividend to its members. The Central Government may allow that person or association of persons to be registered as a limited company without the addition to its name the word “Limited”, or the words “Private Limited”, as the case may be. Dormant company Section 455 of the Act provides that where a company is formed and registered under the Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar for obtaining the status of a dormant company. Inactive company Explanation (i) to Section 455 defines ‘inactive company’ as a company which has not been carrying on any business or operation or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years. Producer Company According to the provisions as prescribed under Section 581A(l) of the Companies Act, 1956, a producer company is a body corporate having objects or activities specified in Section 581B and which is registered as such under the provisions of the Act. The membership of producer companies is open to such people who themselves are the primary producers, which is an activity by which some agricultural produce is produced by such primary producers Investment Company Explanation (a) to Section 186 defines the term ‘investment company’ as a company whose principal business is the acquisition of shares, debentures or other securities. Statutory company Companies set up by special Acts of Parliament or State Legislatures are called statutory companies. E.g., Reserve Bank of India is set up under the Reserve Bank of India Act. Likewise, LIC,UTI etc., are the examples of a statutory company. 3.8 ON THE BASIS OF INCORPORATION Classification of the basis of incorporation. There are three ways in which companies may be incorporated. 1. Chartered Companies: These companies can also be called sovereign companies, which were incorporated before the Independence. 39 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Statutory Companies: Statutory companies are constituted by a special Act of the Parliament or a State Legislature. The provisions mentioned in the Companies Act, 2013 do not apply to them. For example, the Reserve Bank of India, Institute of Company Secretaries of India. 3. Registered Companies: Companies registered and incorporated under the Companies Act, 2013 or any other previous Companies Act are called registered companies. 3.9SUMMARY  An artificial person created under the Companies Act, 2013 with distinct characteristics of separate legal entity and perpetual succession.  The capital of the company is divided into transferable shares and shareholders called as members because their name is entered into the Register of members.  The member of the company generally has limited liability upto the extent of unpaid nominal value of shares held by him.  Saloman vs. Saloman & Co. Ltd. laid that company is a juristic person different and separate from its members.  Under certain situations the courts may lift the corporate veil/ veil of incorporation and thus disregard the separate legal entity of the company. This is called lifting the corporate veil.  The Companies Act, 2013 provides for a variety of companies of which can be promoted and registered under the Act. These companies may be: o • limited by shares. o • limited by guarantee; or o • unlimited companies. o • Companies may also be classified as: (a) Private Companies; (b) Public Companies; (c) One Person Company (d) Company with charitable objects, etc. under Section 8 of the Companies Act, 2013; (e) Small Company (f) Government companies; (g) Foreign companies; (h) Holding companies; and (i) Subsidiary companies. (j) Producer Companies. 3.10KEYWORDS  Board of Directors or Board - in relation to a company, means the collective body of the directors of the company;  Body corporate - Corporation includes a company incorporated outside India, but does not include— (i) a co-operative society registered under any law relating to co- operative societies; and (ii) any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf; 40 CU IDOL SELF LEARNING MATERIAL (SLM)

 Associate company - in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.  Company - means a company incorporated under this Act or under any previous company law  Contributory - means a person liable to contribute towards the assets of the company in the event of its being wound up 3.11LEARNING ACTIVITY 1. A shareholder who has paid rupees 75 on a share of face value rupees 100 can be called upon to pay the balance of rupees 25 only.comment ___________________________________________________________________________ ___________________________________________________________________________ 2. X Industries Ltd. is a company in which 25% of shareholding is held by Central Government; 10% shareholding is held by Government of Maharashtra and 15% shareholding is held by Central Government and Government of Rajasthan. Here, X Industries Ltd. is not a government company as there is no compliance of minimum holding of paid-up share capital i.e. at least 51 % by the Central Government, or by any State Government or Governments or partly by the Central Government and partly by one or more State Government. Comment. ___________________________________________________________________________ ___________________________________________________________________________ 3.12UNIT END QUESTIONS A. Descriptive Questions 41 Short Questions 1. Define dormant company 2. what is meant by producer company? 3. what is government company? 4. what is banking company? 5. what is section 8 company? Long Questions 1.Discuss the classification based on the liability 2. Discuss about the list of other companies 3. Discuss in detail about one person company. 4. what are the ways in which the companies are classified. CU IDOL SELF LEARNING MATERIAL (SLM)

5. Discuss the classification based on the incorporation type. B. Multiple Choice Questions 1. Public Corporations like LIC have been brought into existence through ______ a. Companies Act, 1956 b. Companies Act, 2013 c. Special Act of Parliament d. None of these 2. Internal governance structure of LLP is regulated by ______ a. Companies Act,2013 b. Income Tax Act,1962 c. Contractual Agreement between partners d. Special Act of parliament 3.The property of company is not the property of shareholders; it is the property of the company” was governed by the case study ________ a. Gramophone & Typewriter Co. v. Stanley b. Solamon v. Solamon c. BSN v. Janardan Mohandas Pilai d. None of these 4. A company registered under section 8, shall not alter the provisions of its memorandum or articles except with the previous approval of _________ a. High Court b. Supreme Court c. District Court d. Central Government 5. In ________case the court looked behind the façade of the company and its place of registration in order to determine the true character of the company. a. Daimler Co. Ltd. v. Continental Tyre & Rubber Co. 42 CU IDOL SELF LEARNING MATERIAL (SLM)

b. BSN v. Janardan Mohandas Pilai c. Saloman v. Saloman d. None of these Answers 1-c, 2-c, 3-a, 4-d, 5-a 3.13REFERENCES Textbooks/ReferenceBooks  T1 Kapoor, N.D.; Elements of Company Law; Himalayan Publishing House, Mumbai.T2Kuchhal, M.C. :Company Law Avtar Singh,Company Law, EasternBook Company,Lucknow  R1 Pathak AkhileshwarGarg, Chawla, Sareen, Mercantile Law, Kalyani Publication,NewDelhi. SecuritiesContracts(Regulation)Act,1956  R2SinghAvtar:CompanyLaw; EasternBookCo.,Lucknow 43 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 4 – CLASSIFICATION II STRUCTURE 4.0 Learning objective 4.1 Introduction 4.2 Liability based classification 4.3 Number of members-based classification 4.4 Control based classification 4.5 Listing of shares-based classification 4.6 Government’scontrol-based classification 4.7 Other types of companies 4.8 Summary 4.9 Keywords 4.10 Learning activity 4.11 Unit end Questions 4.12 References 4.0 LEARNING OBJECTIVES After studying this unit, the student will be able to  Understand the various categories in companies  Differentiate between public and private companies  Analyse why there are various categories of companies  Appreciate the importance of Section 8 companies and OPC 4.1 INTRODUCTION Companies are of various types. The companies are classified under various categories like  On the basis of liability  On the basis of number of members  On the basis of control  On the basis of listing of shares  On the basis of government control and  Other types 44 CU IDOL SELF LEARNING MATERIAL (SLM)

All these categories are discussed under. 4.2 LIABILITY BASED CLASSIFICATION The companies are classified according to their liabilities into the following- • Company limited by shares. • Company limited by guarantees. • Unlimited companies. Company limited by share Section 2(22) defines ‘company limited by share’ as a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them. Company limited by guarantee Section 2(21) defines ‘company limited by guarantee’ as a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up. Unlimited Company Section 2(92) defines ‘unlimited company’ as a company not having any limit on the liability of its members. 4.3NUMBER OF MEMBERS BASED CLASSIFICATION The companies are classified on the basis of number of members as- • Public companies. • Private companies. Public Company Section 2(71) defines ‘public company’ as a company which is not a private company. A company which is a subsidiary of a company, not being a private company, shall be deemed to public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles. Private Company Section 2(68) defines ‘private company’ as a company having a minimum paid up share capital as may be prescribed and company which by its articles- (i) restricts the right to transfer its shares. (ii) except in case of One Person Company, limits the number of its members to 200. 45 CU IDOL SELF LEARNING MATERIAL (SLM)

(iii) prohibits any invitation to the public to subscribe for any securities of the company. Where two or more persons hold one or more share in a company jointly, they shall, for the purposes of this clause treated as a single member. The following shall not be included in the number of members- • persons who are in the employment of the company; and • 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 employment ceased. 4.4 CONTROL BASED CLASSIFICATION The companies are classified on the basis of control as- • holding company. • subsidiary company. • Associate company Holding Company As per Section 2(46) ‘holding company’ in relation to one or more other companies, means a body corporate of which such companies are subsidiary companies. Subsidiary Company Section 2(87) defines ‘subsidiary company’ in relation to any other body corporate as 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 voting power. Associate Company If a company has significant influence over another company, the latter will be the Associated Company of the first company. Significant influence is derived either from control of at-least 20% of the total share capital, or of business decisions under an agreement. 4.5 LISTING OF SHARES BASED CLASSIFICATION The public limited companies are eligible for listing its shares on the stock exchanges. On this basis, the public limited companies are classified as- • listed company. • unlisted company. Listed Company 46 CU IDOL SELF LEARNING MATERIAL (SLM)

Section 2(52) defines ‘listed company’ as a company which has any of its securities listed on any recognised stock exchange. Unlisted company A public company which is not listed its shares on any stock exchange is called a non-listed company. 4.6 GOVERNMENT’S CONTROLBASED CLASSIFICATION The companies are classified on the basis of the control of the Government over the company as- • Government company. • Non-Government company. Government Company Section 2(45) defines ‘Government Company’ as any 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 Governments, or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary company of such a Government company. Non-Government company A company in which either of the Government has no paid-up share capital is called as the non-Government company. 4.7 OTHER TYPES OF COMPANIES The other types of companies are as follows- • Associate Company. • Banking company. • Foreign company. • One-personcompany. • Small company. • Section 8 company. • Dormant company. • Inactive company. • Producer company. • Investment company; and 47 CU IDOL SELF LEARNING MATERIAL (SLM)

• Statutory company. Associate Company Section 2(6) of the Act defines the term ‘Associate Company’ in relation to another company, a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence. It includes a joint venture company. The explanation to this section defines the term ‘significant influence’ as control of at least 20% of total share capital or of business decisions under an agreement. Banking Company Section 2(9) defines the term ‘banking company’ as a banking company defined in Section 5(c) of Banking Regulation Act, 1949. Foreign Company Section 2(42) defines ‘foreign company’ as 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. One Person Company Section 2(62) defines ‘One Person Company’ as a company which has only one person as a member. It is also considered as a private company. Small Company Section 2(85) defines ‘small company’ as a company, other than a public company- (i) paid up share capital of which does not exceed `50 lakh rupees or such higher amount as may be prescribed which shall not be more than `10 crore; and (ii) turnover of which is as per its profit and loss account for the immediately preceding Financial Year does not exceed `2 crores or such higher amount as may be prescribed which shall not be more than `100 crores. This definition shall not apply to- • a holding company or a subsidiary company. • a company registered under Section 8; or • a company or body corporate governed by any special Act. Section 8 company 48 CU IDOL SELF LEARNING MATERIAL (SLM)

Such type of company is to be registered with Registrar of Companies and also to obtain licence from the Central Government. If a person or association of person proposed to be registered under the Companies Act, 2013 as a limited company- • has its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object; • intends to apply its profits, if any, or other income in promoting its objects; and • intends to prohibit the payment of any dividend to its members. The Central Government may allow that person or association of persons to be registered as a limited company without the addition to its name the word “Limited”, or the words “Private Limited”, as the case may be. Dormant company Section 455 of the Act provides that where a company is formed and registered under the Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar for obtaining the status of a dormant company. Inactive company Explanation (i) to Section 455 defines ‘inactive company’ as a company which has not been carrying on any business or operation or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years. Producer Company According to the provisions as prescribed under Section 581A(l) of the Companies Act, 1956, a producer company is a body corporate having objects or activities specified in Section 581B and which is registered as such under the provisions of the Act. The membership of producer companies is open to such people who themselves are the primary producers, which is an activity by which some agricultural produce is produced by such primary producers Investment Company Explanation (a) to Section 186 defines the term ‘investment company’ as a company whose principal business is the acquisition of shares, debentures or other securities. Statutory company Companies set up by special Acts of Parliament or State Legislatures are called statutory companies. E.g., Reserve Bank of India is set up under the Reserve Bank of India Act. Likewise LIC,UTI etc., are the examples of a statutory company. 49 CU IDOL SELF LEARNING MATERIAL (SLM)

4.8SUMMARY  The companies are classified on the basis of number of members as-  Public companies.  Private companies.  Section 455 of the Act provides that where a company is formed and registered under the Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar for obtaining the status of a dormant company.  Section 2(62) defines ‘One Person Company’ as a company which has only one person as a member. It is also considered as a private company.  Section 2(9) defines the term ‘banking company’ as a banking company defined in Section 5(c) of Banking Regulation Act, 1949.  Section 2(6) of the Act defines the term ‘Associate Company’ in relation to another company, a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence.  According to the provisions as prescribed under Section 581A(l) of the Companies Act, 1956, a producer company is a body corporate having objects or activities specified in Section 581B and which is registered as such under the provisions of the Act.  Explanation (a) to Section 186 defines the term ‘investment company’ as a company whose principal business is the acquisition of shares, debentures or other securities.  Section 2(45) defines ‘Government Company’ as any 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 Governments, or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary company of such a Government company. 4.9 KEYWORDS  Explanatory Statement To enable shareholders to take apt and a well-informed decision, it is necessary to provide them with requisite information. It covers all the information and facts that may enable members to understand the meaning, scope and implication of the proposed resolution. (see section 102 of Companies Act, 2013)  Special Resolution A resolution is a Special Resolution when it is intended to be passed as a special resolution. The votes cast in favour of such resolution by members who, are required to be not less than three times the number of the votes, if any, cast against the resolution by members so entitled and voting.( See section 114 of Companies Act, 2013) 50 CU IDOL SELF LEARNING MATERIAL (SLM)