Nature and Definition of a Company
Meaning of a Company
Meaning of a Company: A company is a voluntary association of persons formed to carry on business, having a distinct name and limited liability. It is an artificial person created by law with a separate legal existence from its members.
Artificial Person
A company is considered an artificial person because it's created by law and possesses rights and liabilities similar to a natural person. It can enter into contracts, own property, sue, and be sued in its own name.
Separate Legal Entity
The most important characteristic of a company is its separate legal entity. This means the company is distinct from its shareholders and directors. The debts of the company are not the debts of the shareholders, and vice versa.
For example, if a company takes a loan of ₹1 Crore from a bank, the shareholders are not personally liable to repay the loan. The company itself is responsible.
Perpetual Succession
A company enjoys perpetual succession, meaning its existence is not affected by the death, insolvency, or retirement of its members. The company continues to exist until it is legally wound up. The famous line often quoted is: "Members may come, members may go, but the company goes on forever."
Features of a Company
Features of a Company: Understanding the features of a company is crucial for comprehending its operational framework and legal standing.
Limited Liability
Limited liability is a key advantage for shareholders. It means that their liability is limited to the amount of their investment in the company's shares. If the company incurs debts, the personal assets of the shareholders are protected.
For example, if a person invests ₹10,000 in a company's shares, their liability is limited to ₹10,000, even if the company's debts exceed its assets.
Transferability of Shares
Generally, the shares of a public company are freely transferable. This allows shareholders to easily buy and sell their shares on the stock exchange, providing liquidity to their investment. Private companies may have restrictions on the transfer of shares.
Common Seal
A common seal is the official signature of the company. It's a metal seal with the company's name engraved on it. Any document affixed with the common seal and duly signed by authorized officers is binding on the company. While not mandatory in India anymore, many companies still use them.
Separate Property
A company can own property in its own name, separate from its members. Shareholders do not have any proprietary rights in the assets of the company.
For instance, a company can own land, buildings, and equipment in its own name, and these assets belong to the company, not to the shareholders.
Company distinct from its members
The company is a legal entity distinct from its members. It can sue and be sued in its own name, enter into contracts, and conduct business independently of its shareholders.
Lifting the Corporate Veil
Lifting the Corporate Veil: While a company enjoys a separate legal entity, there are circumstances under which courts may disregard this separation and hold the shareholders or directors personally liable for the company's actions. This is known as "lifting the corporate veil."
When the corporate personality can be disregarded
The corporate personality can be disregarded in cases of fraud, evasion of tax, or where the company is used as a vehicle for illegal activities. The courts may lift the corporate veil to determine the real persons behind the company.
Exceptions to the separate legal entity principle
Exceptions to the separate legal entity principle:
- Fraudulent Activities: If the company is formed for fraudulent purposes.
- Tax Evasion: If the company is used to evade taxes.
- Agency: When a company acts as an agent for its shareholders.
- Determination of Enemy Character: During wartime, to determine if a company is controlled by enemy aliens.
- Statutory Provisions: Certain provisions of the Companies Act may impose personal liability on directors or officers in specific situations.
Types of Companies
Companies limited by shares
Companies Limited by Shares: These are companies where the liability of the members is limited to the amount unpaid on the shares held by them. This is the most common type of company.
Public Company
A Public Company is a company that is not a private company. It has no restriction on the transfer of its shares and can invite the public to subscribe to its shares. According to the Companies Act, 2013, a public company must have a minimum of seven members and no limit on the maximum number of members. It must have at least three directors.
Key features of a Public Company:
- Minimum 7 members
- No restriction on transfer of shares
- Can invite public to subscribe to shares
- Must have at least 3 directors
Private Company
A Private Company is a company that has restrictions on the transfer of its shares, limits the number of its members to 200 (excluding employee members), and prohibits any invitation to the public to subscribe for any securities of the company. It must have at least two directors.
Key features of a Private Company:
- Restricts transfer of shares
- Limits the number of members to 200
- Prohibits invitation to the public for subscription of securities
- Must have at least 2 directors
Companies limited by guarantee
Companies Limited by Guarantee: These are companies where the liability of the members is limited to the amount they undertake to contribute to the assets of the company in the event of its being wound up. Such companies are generally formed for non-profit purposes, such as clubs, associations, or charitable organizations.
The members are not liable during the existence of the company. Their liability arises only when the company is being wound up.
Unlimited Companies
Unlimited Companies: These are companies where the liability of the members is unlimited. This means that the members are liable for the debts of the company to the full extent of their personal assets. Unlimited companies are rare in India.
In case of winding up, the personal assets of the members can be used to pay off the company's debts.
Other Types of Companies
Other Types of Companies: Besides the basic classifications, there are several other types of companies recognized under the Companies Act, 2013.
Government Companies
A Government Company is a company in which not less than 51% of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments. Bharat Heavy Electricals Limited (BHEL) and Steel Authority of India Limited (SAIL) are examples of Government Companies in India.
One Person Company (OPC)
A One Person Company (OPC) is a company that has only one person as a member. This concept was introduced in the Companies Act, 2013 to encourage entrepreneurship. An OPC has certain exemptions and relaxations compared to other types of companies.
Key features of an OPC:
- Only one member
- Easier compliance requirements
Small Company
A Small Company is defined based on its paid-up share capital and turnover. As per the Companies Act, 2013, a small company means a company, other than a public company, whose paid-up share capital does not exceed ₹4 Crore and turnover does not exceed ₹40 Crore. (These figures are subject to change based on government notifications).
Producer Company
A Producer Company is a company with the object of production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of primary produce of the Members or import of goods or services for their benefit. The members are primarily producers.
Section 8 Company (for promotion of commerce, arts, science, etc.)
A Section 8 Company is a company registered under Section 8 of the Companies Act, 2013, which is established for promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any other such object, provided it intends to apply its profits, if any, or other income in promoting its objects; and prohibits the payment of any dividend to its members.
Foreign Company
A Foreign Company is a company incorporated outside India but has a place of business in India. It conducts business activities in India in any other manner.
Company Law in India: Historical Development
Companies Act, 1956
Companies Act, 1956: This was the primary legislation governing companies in India for several decades. It was based on the English Companies Act and aimed to regulate the formation, management, and winding up of companies in India. It underwent several amendments during its existence to adapt to the changing economic environment.
Key aspects of the Companies Act, 1956:
- Provided a comprehensive framework for company law.
- Covered aspects like incorporation, share capital, meetings, directors, and winding up.
- Established the office of the Registrar of Companies (ROC) for registration and regulation.
The Companies Act, 2013
The Companies Act, 2013: This Act replaced the Companies Act, 1956, and brought significant changes to company law in India. It aimed to modernize the regulatory framework, enhance corporate governance, and promote transparency and accountability.
Key features and changes introduced
Key features and changes introduced by the Companies Act, 2013:
- Introduction of One Person Company (OPC): This allowed a single individual to form a company.
- Enhanced Corporate Governance: Introduced stricter norms for independent directors, audit committees, and related party transactions.
- Corporate Social Responsibility (CSR): Mandated certain companies to spend a percentage of their profits on CSR activities.
- Class Action Suits: Enabled shareholders to file class action suits against the company for mismanagement.
- National Company Law Tribunal (NCLT): Established a specialized tribunal for corporate disputes.
- Simplified Procedures: Introduced simpler procedures for various corporate actions, such as mergers and acquisitions.
- Emphasis on Transparency: Increased disclosure requirements for companies.
Applicability and scope
The Companies Act, 2013 applies to all companies incorporated in India under this Act or any previous company law. It covers a wide range of aspects, including:
- Incorporation and registration of companies
- Share capital and debentures
- Management and administration of companies
- Accounts and audit
- Oppression and mismanagement
- Winding up of companies
The Act also has provisions relating to foreign companies operating in India.