File Copyright Online - File mutual Divorce in Delhi - Online Legal Advice - Lawyers in India

Company Law: Brief Study

The subject of company law is codified in the Companies Act, 1956. The basic concepts of company law are incorporated in the Act. The Act is a formidable document, containing a large number of Sections and Schedules. It provides a broad legal framework for the operation of companies registered under the Act.

Extent, Application and Scheme of the Act
Extent of the Act
The Act extends to the whole of India except:
  1. As regards the State of Nagaland, it applies, subject to such modifications, if any, as the Central Government may, by notification in the Official Gazette, specify [s.1 (3)];
  2. As regards Goa, Daman and Diu, some of the provisions of the Act shall not apply or shall apply only with such exceptions and modifications or adaptations to any existing company registered under the Act and for such a period or periods as may be specified by notification by the Central Government in the Official Gazette (s.620B); and
  3. As regards Jammu and Kashmir, some of the provisions of the Act as the Central Government may, by notification in the Official Gazette, direct, shall not apply or shall apply only with such exceptions and modifications or adaptations to any existing company or any company registered under the Act as may be specified, after the commencement of the Central Laws (Extension to Jammu and Kashmir) Act, 1968 (i.e., 15 August, 1968) (s.620C).
Application of the Act
The Act applies to the following companies:
  1. Companies formed and registered under the Companies Act, 1956.
  2. Companies formed and registered under the previous company laws, i.e., the existing companies (s.561).
  3. Companies registered but not formed under any previous company laws to the extent and in the manner declared in Part IX (dealing with 'Companies authorized to register under the Act') of the Act (s.562).
  4. Unlimited companies registered as limited companies in pursuance of any previous company laws (s.563).
  5. Unregistered companies for the purpose of winding up under Part X (dealing with 'Winding up of Unregistered Companies,) of the Act (Ss.582, 583 and 589).
  6. Foreign Companies (s.592 to 602).
  7. Insurance companies, banking companies, electricity companies and any other company governed by any special Act for the time being in force, except as far as the provisions of the Companies Act, 1956 are inconsistent with the provisions of the Insurance Act, 1938; Banking Regulation Act, 1949; Indian Electricity Act, 1910; or the Electricity Supply Act, 1948; or any Special Act respectively.

    The provisions of the Companies Act, 1956 apply to these special classes of companies to the extent that such provisions are not inconsistent with those of the Special Acts governing them [clauses (a) to (d) of s.616].
     
  8. Such corporate body incorporated by any Act for the time being in force as the Central Government may, by notification in the Official Gazette, specify on its behalf subject to such exceptions, modifications or adaptations as may be specified therein [clause (e) of s.616].
  9. Government Companies (s.617).
  10. Nidhis or Mutual Benefit Societies declared as such by the Central Government by notification in the Official Gazette [s.620A(2)].
  11. Producer Companies (s.581A to 581ZT).

Non-applicability of the Act
The Companies Act, 1956 is not applicable to certain associations. These are:
  1. Companies established under Special Acts of Parliament, such as Life Insurance Corporation of India, Indian Airlines Corporation, (s.616).
  2. Partnership firms which are governed by the Indian Partnership Act, 1932.
  3. Co-operative Societies which are governed by the Co-operative Societies Act, 1912.
  4. Trusts which are governed by the Indian Trusts Act, 1882.
  5. Societies registered under the Societies Registration Act, 1860.

Scheme of the Act
The scheme of the Act may be considered broadly under five heads, corresponding to the different parts it has. They are:
  1. Formation of Company (Parts II to IV): The provisions of the Act relating to the formation of a company include:
    1. Incorporation of a company
    2. Memorandum and articles of association
    3. Prospectus
    4. Issue of shares and debentures
    5. Certificate to commence business.
       
  2. Management and Administration of Company (Part VI): Under this head, the following provisions are included:
    1. Registered office and name of the company
    2. Members and debenture holders;
    3. Meetings and proceedings;
    4. Managerial personnel
    5. Managerial remuneration;
    6. Accounts;
    7. Audit;
    8. Investigation;
    9. Directors;
    10. Managing directors;
    11. Managers;
    12. Arbitration, compromises, arrangements and reconstructions;
    13. Prevention of mismanagement and oppression.
       
  3. Winding up of Company (Part VII): The Act contains the following provisions as regards to the winding up of companies, viz.,
    1. Modes of winding up;
    2. Winding up by the court;
    3. Voluntary Winding up;
    4. Winding up subject to the supervision of the court.
       
  4. Miscellaneous Provisions (Parts V and VIII to XIII): These include:
    1. Registration of charges;
    2. Application of the Act to companies formed under previous company laws;
    3. Winding up of unregistered companies;
    4. Foreign companies;
    5. Registration offices and officers and fees;
    6. General. The Act is then followed by 15 schedules which, deal with various matters provided in the Act.

Company Law Administration
The present set up dealing with Company Law Administration, directly or indirectly, at various stages and providing for various administrative authorities is as follows:
  1. The Central Government
  2. The Company Law Board
  3. National Advisory Committee on Accounting Standards
  4. Securities and Exchange Board of India
  5. Official Liquidator 6. Advisory Committee
  6. Courts.
 The Central Government (s.637)
The Central Government is the supreme authority responsible for the administration of company law. It acts through the Department of Company Affairs in the Ministry of Law, Justice and Company Affairs. It is, however, not possible for the Central Government to directly look after the day-to-day administration of company law. It has, therefore, delegated its powers to the Company Law Board which acts as the executive arm of the Department of Company Affairs. The Company Law Board exercises powers which have been conferred on it by the Companies Act and those powers which are delegated to it by the Central Government.

Section 637 empowers the Central Government to delegate any of its powers and functions, by notification in the Official Gazette (except the power to appoint Public Trustee under s. 153A) to some other authority as may be specified in the notification.

A copy of every notification shall, as soon as, after it is issued, be placed before both the Houses of Parliament.

Now, for all practical purposes, the day-to-day administration of company law is carried out by the Company Law Board.

Constitution of Board of Company Law Administration
Section 10 E provides as follows:
  1. It empowers the Central Government to constitute the Board of Company Law Administration (CLB).
  2. The Company Law Board shall exercise and discharge such powers and functions as may be conferred on it by or under the Companies Act, 1956 or any other law. Further, it shall also exercise and discharge such other powers and functions of the Central Government under this Act or any other law as may be conferred on it by the Central Government, by notification in the Official Gazette under the provisions of the Companies Act, 1956 or that other law.
  3. The CLB shall consist of such number of members, not exceeding nine, as the Central Government deems fit, to be appointed by that Government by notification in the Official Gazette.
  4. The members of the CLB shall possess such qualifications and experience as may be prescribed.
  5. One of the members of the Board shall be appointed by the Central Government to be the Chairman of the CLB.
  6. No act done by the CLB shall be called in question on the ground only of any defect in the constitution of, or the existence of any vacancy in the CLB.
  7. The CLB may, by order in writing, form one or more Benches from among its members and authorise each such Bench to exercise and discharge such of the Board's powers and functions as may be specified in the order. Every order made or act done by a Bench in exercise of such powers or discharge of such functions shall be deemed to be the order or act, as the case may be, of the Board.
  8. The CLB shall in the exercise of its powers and the discharge of its functions under the Act or any other law be guided by the principles of natural justice and shall act at its discretion.
  9. The CLB shall have power to regulate its own procedure.

Appeals against the Orders of the CLB
Section 10 F provides that any person aggrieved by any decision or order of CLB may file an appeal to the high court within 60 days from the date of communication of the decision or order of CLB to him on any question of law arising out of the order.

This period of 60 days may be extended by a further period not exceeding 60 days if the high court is satisfied that the appellant was prevented by sufficient cause from filing the appeal within the said period of 60 days.

National Advisory Committee on Accounting Standards
Section 210 A provides that the Central Government may, by notification in the Official Gazette, constitute National Advisory Committee on Accounting Standards, to advise the Central Government on the formation and laying down of accounting policies and accounting standards, for adoption by companies or class of companies under the Companies Act, 1956.

The Securities and Exchange Board of India
Section 2(45B) provides that the Central Government may, by notification in the Official Gazette, establish the Securities and Exchange Board of India (in short - SEBI) for the protection of investors in securities.

Powers of SEBI
Section 55A provides that the provisions contained in sections 55 to 58, 59 to 84, 108, 109, 110, 112, 113, 116 to 122, 206, 206 A and 207 shall be administered by SEBI, so far as they relate to issue and transfer of securities and non-payment of dividend in case of:
  1. Listed public companies;
  2. Those public companies which intend to get their securities listed on any recognised stock exchange in India.
Section 209A provides that the books of account and other books and papers of every company shall be open to inspection during business hours, inter alia, by the officers of SEBI as may be authorised by it. However, an inspection may be made without giving any previous notice to the company or any officer thereof. Further, an inspection can be made in respect of matters covered under sections referred to in s.55A.

Further, under s.621, a court may take cognizance of offence relating to the issue and transfer of securities and non-payment of a dividend, on a complaint in writing, by a person authorised by SEBI
Official Liquidator
For the purpose of winding up of companies by the court, there shall be an official liquidator, who may be:

appointed from a panel of professional firms of chartered accountants, advocates, company secretaries, cost and works accountants which the Central Government constitutes for the court.

a body corporate, consisting of such professionals as may be approved by the Central Government.
a whole time or a part time officer, appointed by the Central Government.

Advisory Committee
Section 410 provides that for the purpose of advising the Central Government and the Company Law Board on the matters arising out of the administration of the Companies Act, 1956, as may be referred to it by the Central Government or the Company Law Board, the Central Government may constitute this Committee consisting of not more than 5 persons with suitable qualifications. The Central Government is, however, not bound to constitute an Advisory Committee.

Moreover, even if an Advisory Committee is constituted neither the Central Government nor the Company Law Board is bound to accept its advice.

Courts
According to section 2, the 'Court' means:
  1. With respect to any matter relating to a company (other than any offence against the Act) the Court having jurisdiction under this Act with respect to that matter relating to that company, as provided in s.10;
  2. With respect to any offence against this Act, the Court of a Magistrate of the First Class or, as the case may be, a Presidency Magistrate, having jurisdiction to try such offence.

Jurisdiction of Courts
As regards to the jurisdiction of Courts, section 10 provides as follows:
  1. The court having jurisdiction under this Act shall be:
    1. The High Court having jurisdiction in relation to the place at which the registered office of the company concerned is situated, except to the extent to which jurisdiction has been conferred on any District Court or District Court subordinate to that High Court in pursuance of (2) below; and
    2. Where jurisdiction has been so conferred, the District Court in regard to matters falling within the scope of the jurisdiction conferred, in respect of companies having their registered offices in the district.
       
  2. The Central Government may, by notification in the Official Gazette and subject to such restrictions, limitations and conditions as it thinks fit, empower any District Court to exercise all or any of the jurisdiction conferred by this Act upon the court, not being the jurisdiction conferred by this Act upon the court:
    1. In respect of companies generally, by Sections 237, 391, 394, 395 and 397 to 407, both inclusive;
    2. In respect of companies with a paid up share capital of not less than 1 lakh of rupees, by Part VII (Sections 425 to 560) and the other provisions of this Act relating to the winding up of companies.
       
  3. For the purposes of jurisdiction to wind up companies, the expression 'registered office' means the place which has longest been the registered office of the company during the six months immediately preceding the presentation of the petition for winding up.
     
Summary
The Companies Act, 1956, has been in force for the last 55 years.
The Act confers a variety of powers on the Central Government and the Company Law Board to monitor, regulate and control the affairs of the companies.

To ensure better management of companies, the Central Government accord approval for the appointment and reappointment of persons as Managing Directors, Whole-time Directors or Managers of a public limited or private limited company which is a subsidiary of a public limited company, under Section 269 read with Section 388 of the Companies Act.

In 1988, the Government dispensed with the requirement of the approval for appointment of managerial personnel in respect of cases which fulfill the conditions as prescribed in Schedule XIII of the Act.

This Schedule can be modified to suit the changing needs of the time and circumstances in keeping with this policy of regulation by exception.

Officer: Section 2(30) provides that the term 'Officer' includes any director, manager or secretary or any person in accordance with whose directions or instructions the board of directors or any one or more of the directors is or are accustomed to act.

SEBI: Section 2(45B) provides that the Central Government may, by notification in the Official Gazette, establish the Securities and Exchange Board of India (in short - SEBI) for the protection of investors in securities.

The Central Government: The Central Government is the supreme authority responsible for the administration of company law.

Introduction
A company, in its ordinary, non-technical sense, means a body of individuals associated for a common objective, which may be to carry on business for gain or to engage in some human activity for the benefit of the society. Accordingly, the word 'company' is employed to represent associations formed to carry on some business for profit or to promote art, science, education or to fulfill some charitable purpose. This body of individuals may be incorporated or unincorporated.

Definition of a Company
The Companies Act, 1956 defines the word 'company' as a company formed and registered under the Act or an existing company formed and registered under any of the previous company laws (s.3). This definition does not bring out the meaning and nature of the company into a clear perspective. Also s.12 permits the formation of different types of companies. These may be (i) companies limited by shares, (ii) companies limited by guarantee and (iii) unlimited companies. The vast majority of companies in India are with limited liability by shares. Therefore, it is advisable to define the term 'company' keeping in mind this type of company. However, a brief description of other types of companies will be given later in unit 3.

Lord Lindley has described the 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 (as the case may be) arising therefrom". The common stock so contributed is denoted in money and is 'the capital' of the company. The persons who contribute to it, or to whom it belongs, are members.

The proportion of capital to which each member is entitled is his 'share'. The member may sell his share in the company, thus, withdrawing himself and making someone else a member to whom he transfers shares. Thus, shares in a company are transferable. As a natural consequence of transferability of shares, the company has what is commonly known as perpetual succession. With the withdrawal or death of a member of a company, the latter does not come to an end. The life of the company is independent of the lives of the members of the company. Members may come and members may go, the company continues until it is dissolved.

Gower, L.C.B. in his book entitled The Principles of Modern Company Law gives an interesting example. He says, 'During the war all the members of one private company, while in general meeting, were killed by a hydrogen bomb. But the company survived, not even a hydrogen bomb could have destroyed it'.

Section 34(2) gives the effect of registration of a company by identifying the features it acquires as a consequence thereof. The section provides that:

"From the date of incorporation mentioned in the certificate of incorporation, such of the subscribers of the memorandum and other persons, as may from time to time be members of the company, shall be a body corporate by the name contained in the memorandum, capable forthwith of exercising all the functions of an incorporated company and having perpetual succession and a common seal, but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as is mentioned in the Act.

Characteristics of Company
On the basis of the above observations, we may spell out the following characteristic features of a company.

Incorporated Association
A company must be incorporated or registered under the Companies Act. Minimum numbers required for the purpose is 7, in case of a public company and 2, in case of a private company (s.12). It may also be mentioned that as per s.11, an association of more than 10 persons, in case of banking business and 20 in case of any other business, if not registered as a company under the Companies Act, or under any other law for the time being in force, becomes an illegal association.

Artificial Person
A company is created with the sanction of law and is not itself a human being, it is therefore, called artificial; and since it is clothed with certain rights and obligations, it is called a person. A company is accordingly, an artificial person.

Separate Legal Entity
Unlike partnership, company is distinct from the persons who constitute it. Section 34 (2) says that on registration, the association of persons becomes a body corporate by the name contained in the memorandum. Lord Macnaghten in the famous case of Salomon v. Salomon & Co. Ltd. (1897) AC 22 observed that:

A company is at law a different person altogether from the subscribers…..; and though it may be that after incorporation the business is precisely the same as it was before and the same persons are managers and the same hands receive the profits, the company is at law not the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act.

The facts of the famous Salomon's case were as follows:
Salomon carried on business as a leather merchant. He sold his business for a sum of £30,000 to a company formed by him along with his wife, a daughter and four sons. The purchase consideration was satisfied by allotment of 20,000 shares of £1 each and issue of debentures worth £10,000 secured by floating charge on the company's assets in favour of Mr Salomon. All the other shareholders subscribed for one share of £1 each. Mr Salomon was also the managing director of the company.

The company almost immediately ran into difficulties and eventually became insolvent and winding up commenced. At the time of winding up, the total assets of the company amounted to £6,050; its liabilities were £10,000 secured by the debentures issued to Mr Salomon and £8,000 owing to unsecured trade creditors. The unsecured sundry creditors claimed the whole of the company's assets, viz. £6,050 on the ground that the company was a mere alias or agent for Salomon.

Held: The contention of the trade creditors could not be maintained because the company being in law a person quite distinct from its members, could not be regarded as an 'alias' or agent or trustee for Salomon. Also the company's assets must be applied in payment of the debentures as a secured creditor is entitled to payment out of the assets on which his debt is secured in priority to unsecured creditors.

In Lee v. Lee Air Farming Limited (1960) 3 All ER 429 PC, a company was formed for the purpose of manufacturing aerial top-dressing. Lee, a qualified pilot, held all but one of the shares in the company and by the articles was appointed governing director of the company and chief pilot. Lee was killed while piloting the company's aircraft and his widow claimed compensation for his death under the Workmen Compensation Act. The company opposed the claim on the ground that Lee was not a 'worker' as the same person could not be employer and the employee.

Held: There was a valid contract of service between Lee and the company; and Lee was, therefore, a worker. Mrs. Lee's contention was upheld.

In Bacha F. Guzdar v. The Commissioner of Income-Tax, Bombay [AIR (1955) SC. 74], the facts of the case were as follows:

The plaintiff (Mrs. Guzdar) received certain amounts as dividend in respect of shares held by her in a tea company. Under the Indian Income-tax Act, agricultural income is exempted from payment of income-tax. As income of a tea company is partly agricultural, only 40 per cent of the company's income is treated as income from manufacture and sale and, therefore, liable to tax. The plaintiff claimed that the dividend income in her hands should be treated as agricultural income up to 60 per cent, as in the case of a tea company, on the ground that dividends received by shareholders represented the income of the company.

Held: By the Supreme Court, that though the income in the hands of the company was partly agricultural yet the same income when received by Mrs. Guzdar as dividend could not be regarded as agricultural income.

Limited Liability
The company being a separate person, its members are not as such liable for its debts. Hence, in the case of a company limited by shares, the liability of members is limited to the nominal value of shares held by them. Thus, if the shares are fully paid up, their liability will be nil. However, companies may be formed with unlimited liability of members or members may guarantee a particular amount. In such cases, liability of the members shall not be limited to the nominal or face value of the shares held by them. In case of unlimited liability companies, members shall continue to be liable till each paise has been paid off. In case of companies limited by guarantee, the liability of each member shall be determined by the guarantee amount, i.e., he shall be liable to contribute up to the amount guaranteed by him.

Unlimited Liability of a Member of a Limited Liability Company
In the following cases, a shareholder or member shall lose the privilege of limited liability:
  1. Where members of the company are reduced below the statutory minimum, viz., 7 in case of a public company and 2 in case of a private company and the company carries on the business for more than 6 months while the members are so reduced, every person who is a member during the time that it so carries on business after those 6 months and is aware of the fact that it is operating with fewer than the requisite number shall be personally liable for the whole of the debts contracted during that time (s.45).
     
  2. Where in the course of winding up, it appears that any business of the company has been carried on with intent to defraud creditors; the Court may declare the persons who were knowingly parties to the transaction personally liable without limitation of liability for all or any of the debts or other liabilities of the company (s.542).


Separate Property
Shareholders are not, in the eyes of the law, part owners of the undertaking. In India, this principle of separate property was best laid down by the Supreme Court in Bacha F. Guzdar v. The Commissioner of Income Tax, Bombay (Supra). The Supreme Court held that "a shareholder is not the part owner of the company or its property, he is only given certain rights by law, e.g., to vote or attend meetings, to receive dividends"

Similarly, in R. F. Perumal v. H. John, it was observed that "no member can claim himself to be owner of the company's property during its existence or on its winding up. In still another case, it was observed that " even where a shareholder held almost entire share capital, he did not even have an insurable interest in the property of the company". In Macaure v. Northern Assurance Co. Ltd., the facts were as follows:

'Macaure' held all except one share of a timber company. He had also advanced substantial amount to the company. He insured the company's timber in his personal name. On timber being destroyed by fire, his claim was rejected for want of insurable interest. The Court applying principle of separate legal entity held that the insurance company was not liable.

Transferability of Shares
Since business is separate from its members in a company form of organisation, it facilitates the transfer of member's interests. The shares of a company are transferable in the manner provided in the Articles of the company (s.82). However, in a private company, certain restrictions are placed on such transfer of shares but the right to transfer is not taken away absolutely.

Perpetual Existence
A company being an artificial person cannot be incapacitated by illness and it does not have an allotted span of life. The death, insolvency or retirement of its members leaves the company unaffected. Members may come and go but the company can go forever. The saying "King is dead, long live the King" very aptly applies to the company form of organisation.

Common Seal
A company being an artificial person is not bestowed with a body of natural being. Therefore, it has to work through its directors, officers and other employees. But, it can be held bound by only those documents which bear its signature. Common seal is the official signature of a company.

Seal of company when to be used: The articles of association of the company provide for putting the seal of the company on documents. Apart from those documents, the company seal is to be put on power of attorney, deed of lease, share certificates, debentures, debenture trust deed, deed of mortgage, promissory notes, negotiable instruments (except cheques), agreement of hypothecation, loan agreements with banks and financial institutions, contract of employment, guarantees issued by the company and all formal documents and documents executed on stamp papers.

Use of Seal Outside India (s.50)
Where a company has any business or transaction in a place outside India, a facsimile (exact reproduction) of the common seal may be kept there. The seal should also contain the name of the place where the seal would be used. For such use, there must be power in the articles. A person must be properly authorised to use the seal, who shall sign his name and also put the name of the place and the fact that he has been authorised to do so by the specified resolution.

As per s.48, a company may, by writing under its common seal, empower any person, either generally or in respect of any specified matters, as its attorney, to execute deeds on its behalf in any place either in or outside India [s.48(1)].

It further provides that a deed signed by such an attorney on behalf of the company and under his seal where sealing required, shall bind the company and have the same effect as if it were under its common seal[s.48(2)].

Company may sue and be sued in its own name
Another fallout of separate legal entity is that the company, if aggrieved by some wrong done to it may sue or be sued in its own name. In Rajendra Nath Dutta v. Shibendra Nath Mukherjee (1982) (52 Comp. Cas. 293 Cal.), a lease deed was executed by the directors of the company without the seal of the company and later a suit was filed by the directors and not the company to avoid the lease on the ground that a new term had been fraudulently included in the lease deed by the defendants.

Held that a director or managing director could not file a suit, unless it was by the company in order to avoid any deed which admittedly was executed by one of the directors and admittedly also the company accepted the rent. The case as made out in the plaint was not made out by the company but by some of the directors of the company and the company was not even a plaintiff. If the company was aggrieved, it was the company which was to file the suit and not the directors. Therefore, the suit was not maintainable.

Lifting of the Corporate Veil
A company is distinct from its members. It is a separate legal entity. There is thus, a veil between a company and its members keeping them both separate from each other. However, sometimes it becomes necessary to lift this veil, disregard the distinct corporate entity of the company and find out the realities of the company. The court may investigate the real affairs, ownership, etc., of the company. This is called lifting or piercing the corporate veil. In other words, the Court investigates into the true state of affairs of the company. It has been observed that though a corporation is a distinct entity, yet in reality, it is an association of persons who are in fact the beneficial owners of all the corporate property.

The corporate veil is therefore lifted by the court, when it ignores the company and concerns itself directly with the members or managers. It is largely in the discretion of the Courts and will depend upon the underlying social, economic and moral factors as they operate in and through the corporation.

The corporate veil may be lifted in the following instances:
  • To investigate the relationships between the holding company and subsidiary company;
  • To investigate the number and names of members of the company;
  • To investigate the true ownership of shares and controlling power over the company;
  • To investigate lawful objects of the company;
  • To investigate mismanagement and oppression by the majority;
  • To investigate the character of the company where it is trading with an alien enemy or persons managing the affairs of the company are under the control of enemies or been residing in enemy country;
  • To investigate into the affairs where there exists a tendency to create monopoly;
  • To investigate the company affairs where it is used for tax evasion or to circumvent tax obligation;
  • To investigate if the company is acting as an agent for its shareholders;
  • To investigate the affairs where it is formed for fraudulent purposes, to defeat and circumvent the law or to defraud its creditors or to avoid valid obligations.
  • Bombay High Court in (2004) 121 Comp. Cas 314 has held that the corporate veil may be lifted to the extent permitted under the statute and no more.

The advantages of incorporation are allowed to be enjoyed only by those who want to make an honest use of the 'company'. In case of a dishonest and fraudulent use of the facility of incorporation, the law lifts the corporate veil and identifies the persons (members) who are behind the scene and are responsible for the perpetration of fraud.

Following are some such cases:
For the Protection of Revenue: The Court may not recognize the separate existence of a company where the only purpose for which it appears to have been formed is the tax-evasion or circumvention of tax obligation. D was a rich man having dividend and interest income. He wanted to avoid surtax. For this purpose, he formed four private companies, in all of which he was the majority shareholder.

The companies made investments and whenever interest and dividend incomes were received by the companies, D applied to the companies for loans which were immediately granted and never repaid. In a legal proceeding, the corporate veils of all the companies were lifted and the incomes of the companies treated as if they were of 'D' [In re Dinshaw Maneckjee Petit (1927) Bom. 371].

Where the company is acting as agent of the shareholders: In such circumstances, the shareholders will be held liable for its acts. There may be an express agreement to this effect or such agreement may be implied from the facts of a particular case.

Where a company has been formed by certain persons to avoid their own valid contractual obligation: In such conditions, the court may proceed on the assumption as if no company existed.

Example: A sold his business to B and agreed not to compete with him for a given number of years within reasonable local limits. A, desirous of re-entering business, in violation of the contractual obligation, formed a private company with majority shareholdings. B filed a suit against 'A' and the private company and the court granted an injunction restraining 'A' and his company with going ahead in the competing business (Gilford Motor Co. v. Horne (1933) 1 Ch. 935).

Where a company has been formed for some fraudulent purpose or is a 'sham': The court will lift the corporate veil in such circumstances to identify the perpetrator of the fraud. In Delhi Development Authority v. Skipper Construction Company (P) Ltd. [1996] 4 SCALE

202, the skipper construction company failed to pay the full purchase price of a plot to DDA. Instead construction was started and space sold to various persons. The two sons of the directors who had business in their own names claimed that they had separated from the father and the companies they were running had nothing to do with the properties of their parents. But no satisfactory proof in support of their claim could be produced. Held, that the transfer of shareholding between the father and the sons must also be treated as a sham.

The fact that the director and members of his family had created several corporate bodies did not prevent the court from treating all of them as one entity belonging to and controlled by the director and his family.

Where a company formed is against public interest or public policy: Where for the purpose of determining the character of the members, the Court may lift the corporate veil.
Example: C company was floated in London for marketing tyres manufactured in Germany. The majority of C's shares were held by the German nationals residing in Germany.

During World War I, C company filed a suit against D company for the recovery of trade debt. The D company contended that C company was an alien enemy company (Germany being at war with England at that time) and that the payment of the debt would be a trading with the enemy. The Court agreed with the contention of the defendants [Daimler Co. Ltd. v. Continental Tyre and Rubber Co., (1916) 2AC 307].

Where device of incorporation is used for some illegal or improper purpose: [PNB Finance Ltd. v. Shital Prasad Jain (1983) 54 Comp. Cas 66 (Delhi)]. S, the financial advisor of a financing public limited company was given a loan of 15 lakhs by the company to purchase immovable properties in Delhi. A pronote with regard to the same was also executed by S. S diverted the amount of the loan to three public limited companies floated by him and his son. These companies, in turn, applied the amount in purchasing immovable properties at New Delhi. The Delhi High Court refrained the defendants from in any manner alienating, transferring, disposing of or encumbering the properties in question.

Where the number of members falls below the statutory minimum: (i.e., seven in the case of a public company and two in the case of a private company) and the company continues to carry on business for more than six months while the number is so reduced. In such a case, every person who is a member of the company during the time that it so carries on business after those six months and has knowledge of that fact, shall be severally liable to the creditors for the payment of the company's debts contracted during that period.

Such a member can be sued severally (i.e., directly) by the creditors of the company. Both the privileges of limited liability and that of the separate legal entity are lost. The creditors are permitted to look behind the company to the shareholders for the satisfaction of their claims (s.45).

Where prospectus includes a fraudulent misrepresentation: In case of a prospectus containing fraudulent misrepresentation as to a material fact, Ss. 62 and 63 make the promoters, directors, etc., personally liable not only in damages but they may even be prosecuted in terms of fine up to 50,000 or imprisonment up to 2 years or both.

Where a negotiable instrument is signed by an officer of a company on behalf of the company without mentioning the name of the company: Thereon, he is personally liable to the holder of the instrument, unless the company has already made the payment on the instrument [s.147 (4) (c)].

Holding and Subsidiary Companies: (Ss. 212-213). In the eyes of law, the holding company and its subsidiaries are separate legal entities. However, in the following cases, a subsidiary company may lose its separate identity to a certain extent:

Where at the end of its financial year, a company has subsidiaries, it may lay before its members in general meeting not only its own accounts, but also a set of group accounts showing the profit or loss earned or suffered by the holding company and its subsidiaries collectively and their collective state of affairs at the end of the year;

The Central Government, where it feels desirable, may direct the holding and subsidiary companies to synchronize their financial years;
The Court may, on the facts of a case, treat a subsidiary company as merely a branch or department of one large undertaking owned by the holding company.

Investigation into related companies: Section 239 provides that if it is necessary for the satisfactory completion of the investigation into the affairs of a company, the Inspector appointed to investigate may look into the affairs of another related company in the same management or group.

For investigation of ownership of a company: The separate legal entity may be disregarded under s.247. This Section authorises the Central Government to appoint one or more Inspectors to investigate and report on the membership of any company for the purpose of determining the true persons who are financially interested in the company and who control or materially influence its policy.

Business intended to defraud creditors: Where in the course of winding up of a company, it appears that any business of the company has been carried on, with intent to defraud creditors of the company, or any other persons, or for any fraudulent purpose, the court on the application of the Liquidator, or any creditor or contributory of the company, may, if it thinks proper, declare that any persons who are knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct (s.542).

Company Distinguished from Partnership
Section 4 of the Indian Partnership Act, 1932 defines a partnership as 'the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all'. Persons who enter into a partnership are individually called 'Partners' and collectively a 'Firm', and the name under which the business is carried on is called the 'Firm's Name'.

The essential characteristics of a partnership organisation are:
  1. A partnership is an association of two or more than two persons. However, a limit is placed by s.11 of the Companies Act, 1956 on the maximum number of partners – at ten in case of banking business and twenty in case of any other business.
  2. A partnership must be the result of an agreement between two or more persons.
  3. The agreement must be to carry on some business.
  4. The agreement must be to share profits of the firm.
  5. The business must be carried on by all or any of them acting for all. The partnership is based upon the idea of mutual agency. Every partner assumes a dual role – that of a principal and an agent.
  6. The liability of each partner of the firm is unlimited in respect of the firm's debts.
  7. A partnership firm has no independent legal existence apart from the persons who constitute it.
  8. A partnership agreement is based on mutual confidence and trust of the partners.
  9. No partner can transfer his share in a partnership to an outsider without the consent of all the other partners.
  10. No change can be made in the nature of the partnership business without the consent of all the partners.

A partnership firm may be distinguished from a company in the following ways:
  1. Legal Status:
    A partnership firm has no existence apart from its members. A company is a separate legal entity distinct from its members.
  2. Mutual Agency:
    A partnership is founded on the idea of mutual agency – every partner is an agent of the rest of the partners. A member of a company is not an agent of the other members.
  3. Liability of Members:
    The liability of a partner is unlimited, i.e., even his own personal assets are liable for the debts of the firm. The liability of a member of a limited company is limited to the extent of the amount remaining unpaid on shares held by him or the amount of guarantee, as mentioned in the memorandum of association of the company.
  4. Transfer of Interest:
    A partner cannot transfer his interest in the partnership without the consent of all other partners. A member, subject to the restrictions contained in the articles, can freely transfer his shares in the company
  5. Duration of Existence:
    Unless there is a contract to the contrary, the death, retirement, or insolvency of a partner results in the dissolution of the firm. In contrast, a company enjoys a perpetual succession. Death or retirement or insolvency of a member of a company does not affect the existence of the company.
  6. Minimum Membership:
    The minimum number of persons required to form a partnership is two. The minimum number required to form a private company is two and in the case of a public company the minimum number is seven.
  7. Maximum Membership:
    A partnership cannot be formed by more than twenty persons. The number is limited to ten in the case of a banking business. In the case of a public company, there is no limit to the maximum number of members. However, a private company cannot have more than fifty members.
  8. Audit:
    The audit of the accounts of a firm is not compulsory, whereas the audit of accounts of a company is mandatory.
  9. Use of the Words 'Limited' and 'Private Limited' not Allowed:
    Section 631 provides that if any person or persons trade or carry on business under any name or title of which the words, "Limited" or "Private Limited" are the last words, that person or each of these persons shall, unless duly incorporated as a public or a private company, as the case may be, be punishable with fine which may extend to 500 for every day upon which that name has been used.

Kinds of Companies
Introduction
In the case of a body corporate which is incorporated in a country outside India, a subsidiary or holding company of the body corporate under the law of such country shall be deemed to be a subsidiary or holding company of the body corporate within the meaning and for the purposes of this Act also, whether the requirements of this section (S.4) are fulfilled or not.

A private company, being a subsidiary of a body corporate incorporated outside India, which, if incorporated in India, would be a public company within the meaning of this Act, shall be deemed for the purposes of this Act to be a subsidiary of a public company if the entire share capital in that private company is not held by that body corporate whether alone or together with one or more other bodies corporate incorporated outside India.

Classification on the Basis of Incorporation
Companies can be classified into three categories according to the mode of incorporation. If a company is incorporated by a charter granted by the monarch, it is called a Chartered Company and is regulated by that charter. For example, the East India Company came into being by the grant of a Royal Charter. Such types of companies do not exist in India. A company which is created by a special Act of the Legislature is called a Statutory Company and is governed by the provisions of that Act. The State Bank of India and the Industrial Finance Corporation of India are two examples of statutory companies. A company brought into existence by registration of certain documents under the Companies Act, 1956 is called a Registered Company.

Classification on the Basis of Liability
The liability of members of a registered company may be limited or unlimited (s.12). It may be limited by shares, or by guarantee or by both (i.e., shares and guarantee).

Companies Limited by Shares
A company limited by shares is a registered company having the liability of its members limited by its memorandum of association to the amount, if any, unpaid on the shares respectively held by them. The amount remaining unpaid on the shares can be called up at any time—during the lifetime of the company or at the time of winding up. However, a shareholder cannot be called upon to pay more than the amount remaining unpaid on his shares. His personal assets cannot be called upon for the payment of the liabilities of the company, if nothing remains to be paid on the shares purchased by him. Such a company is also known as a 'Share Company.'

Companies Limited by Guarantee
A company limited by guarantee is one having the liability of its members limited by the memorandum to such 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. Such a company is also known as 'guarantee company'. The liability of the members of a guarantee company is limited by a stipulated sum mentioned in the memorandum. The guaranteed amount can be called up by the company from the members only at the time of winding up if the liabilities of the company exceed its assets.

A pure 'guarantee company' does not have a share capital. The working funds, if required, are raised from source like fees, donations, subsidy, endowments, grants, subscriptions and the like. Such a company is generally formed for the purpose of promotion of art, science, culture, charity, sport, commerce or for some similar purpose.

Hybrid Companies
A company limited by shares as well as by guarantee is a hybrid form of company which combines elements of the guarantee and the share company. Such a company raises its initial capital from its shareholders, while the normal working funds are provided form other sources such as fees, charges, subscription, etc. Every member of such a company is subject to a two-fold liability, i.e., the guarantee which may become effective in the winding up of the company and the liability to pay up to the nominal amount of his share which may become effective during the lifetime of the company or at the time of winding up.

Companies with Unlimited Liabilities
An unlimited company is a company not having any limit on the liability of its members. The members of such a company are liable, in the event of its being wound up, to the full extent of their fortunes to meet the obligations of the company. However, the members are not liable to the company's creditors. The company, being a separate legal entity from the persons who constitute it, is liable to its creditors. If the creditors cannot obtain payment from the company, they may petition the court for the winding up of the company. The Liquidator will then call upon the members to contribute to the assets of the company without limitation of their liability for the payment of the debts of the company.

Classification on the Basis of Number of Members
From the point of view of the general public and on the basis of number of members, a company may be classified as:
  1. Private company
  2. Public company

Private Company
A private company can be formed by merely two persons by subscribing their names to the Memorandum of Association. It means a company which has a minimum paid-up capital of one lakh rupees or such higher paid up capital as may be prescribed; and by its Articles:
  1. Restricts the rights of its members to transfer shares;
  2. Limits the number of its members to fifty, excluding its employee-members or past employee-members; provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purpose of this definition, be treated as a single member;
  3. Prohibits an invitation to the public to subscribe to its shares and debentures; and
  4. Prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.
  Public Company
A public company means a company:
  1. Which is not a private company;
  2. Has a minimum paid-up capital of 5 lakhs or such higher paid-up capital as may be prescribed;
  3. Is a private company which is a subsidiary of a company which is not a private company.

Section 12 prescribes the minimum number of members as seven who have to subscribe their names to the memorandum of association but there is no restriction with regard to the maximum number of members of a public company. A public company may or may not invite public to subscribe to its share capital. In case, it decides to invite public to subscribe to its share capital, then it has to issue a prospectus.

In case, it decides not to invite public to subscribe to its share capital and arranges the capital privately then it need not issue a prospectus; it has simply to submit a statement in lieu of prospectus with the Registrar of Companies at least three days before it can make allotment of shares. The articles of such a company do not contain provisions restricting the right of members to transfer their shares. Under the Securities (Contracts) Regulation Act, 1956, shares and debentures of public companies only are capable of being dealt in on a stock exchange.

Special Privileges and Exemptions available to a Private Company
A private company enjoys certain special privileges which are not available to a public company. It is so because in a private company the money is raised from few people and generally they belong to the same family or group or are close friends. Therefore, not much public interest is involved therein. But in case of public companies where the money is raised from general public and the number is quite large, it is necessary to safeguard their interests, hence, several restrictions are imposed on public companies.

Following are the special privileges available to a private company:
  • A private company can be formed with only two members [s.12 (1)].
  • A private company can proceed to allot shares without waiting for the minimum subscription (s.69). The reason is that a private company is not required to offer shares to the public.
  • A private company is not required to issue a prospectus. Therefore, it can allot shares without issuing a prospectus or delivering to the Registrar a statement in lieu of prospectus [s.70 (3)].
  • A private company need not offer further issue of shares to the existing shareholders, i.e., a private company is free to allot new issue to outsiders [s.81(3)].
  • A private company can issue any kind of shares and allow disproportionate voting rights since Ss. 85 to 89 of the Act are not applicable to it. [s.90(2)].
  • A private company can commence business immediately after its incorporation [s.149 (7)].
  • It need not have an index of members [s.151 (1)].
  • A private company is not required to hold a statutory meeting or to file a statutory report with the Registrar of Companies [s.165 (10)].
  • Only two members, who are personally present at the meeting, shall form the quorum unless the articles provide for a larger number [s.174 (1)].
  • In case of a private company, poll can be demanded by one person present in person or by proxy, if not more than seven persons are present; if the number present is more than seven, two members present in person or by proxy can demand a poll [s.179 (1) (b)].
  • A private company need have a minimum of two directors only [s.252 (2)].
  • All the directors may be appointed by a single resolution.
  • The directors of a private company need not file their written consent to act as directors or to take up their qualification share (Ss.264 & 266).
  • The directors of a private company need not retire by rotation (s.255).
  • Section 266 dealing with restrictions on appointment or advertisement of directors is not applicable to a private company [s.266 (5) (b)].
  • Where a new director is to be appointed, a special notice of fourteen days is required. This provision is not applicable to a private company, unless it is a subsidiary of a public company [s.257 (2)].
  • Directors of a private company can vote on a contract in which they are interested (s.300).
  • A private company is exempted from restrictions regarding managerial remuneration.

Loss of Privileges by a Private Company
Section 43 provides that if a private company contravenes any of the three conditions included in its Articles as per s.3(1) (iii), then it will be treated as if it is a public company and it will then result in loss of privileges and exemptions to which it is normally entitled to.

The provision to s.43 states that if the contravention of any of the three restrictions contained in the articles was accidental, or if the Central Government is satisfied that it is just and equitable to grant relief, it may relieve the company from these consequences on the application by the company or any other interested person.

Conversion of a Private Company into a Public Company
Section 44 provides for conversion of a private company into a public company. The procedure is:
The company in general meeting must pass a special resolution altering its articles in such a manner that they no longer include the provisions of s.3(1) (iii) which are required to be included in the articles of a private company. On the date of the passing of the resolution, the company ceases to be a private company and becomes a public company.

Within thirty days of the passing of the special resolution altering the articles, the company shall file with the Registrar (i) a printed or type-written copy of the special resolution and (ii) a prospectus or a statement in lieu of prospectus.

If default is made in filing the resolution and the prospectus or the statement in lieu of prospectus, the company and every officer in default shall be liable to a fine up to 5,000 for every day of default.

If the number of members is below seven, steps should be taken to increase it to at least seven whilst the number of directors should be increased to at least three, if there are only two directors.

The word 'Private' is to be deleted before the word 'Limited' in the name.

Conversion of Public Company into a Private Company
There is no direct or express provision in the Act for the conversion of a public company into a private company except a reference in the proviso to s.31(1). A public company having a share capital and membership within the limits imposed upon private companies by s.3(1) (iii), may become a private company by following the procedure as given below:
The company in general meeting has to pass special resolution for altering the articles so as to include therein the necessary restrictions, limitations and prohibitions and to delete any provision inconsistent with the restrictions. For instance, a private company has to put certain restrictions on the right of members to transfer their shares.

The word 'Private' should be added before 'Limited'.

The approval of the Central Government to the alteration in the articles for converting a public company into a private company should be obtained.

Within one month of the date of the receipt of the order of approval, a printed copy of the altered articles must be filed with the Registrar.

With thirty days of the passing of the special resolution, a printed or type-written copy thereof should be filed with the Registrar.

Classification on the Basis of Control
On the basic of control, companies can be divided into:
  1. Holding companies
  2. Subsidiary companies

Holding and Subsidiary Companies
Where a company has control over another company, it is known as the Holding Company. The company over which control is exercised is called the Subsidiary Company. A company is deemed to be under the control of another if:

That other controls the composition of its Board of Directors.
The other company holds more than half in nominal value of its equity share capital (where a company had preference shareholders, before commencement of this Act, enjoying voting rights with that of equity shareholders, for the purpose of control, holding company should enjoy more than half of the total voting power).

It is a subsidiary of a third company which itself is a subsidiary of the controlling company. For example, where company 'B' is a subsidiary of company 'A' and company 'C' is a subsidiary of company 'B', then company 'C' shall be a subsidiary of company 'A'. If company 'D' is a subsidiary of company 'C', then company 'D' shall also be a subsidiary of company 'B' and consequently also of company 'A'.

Thus, in order to be holding company, a company must either control the composition of the Board of Directors or hold more than half of the nominal value of the equity share capital of another company.

Company Controlling Composition of Board of Directors
The composition of the Board of Directors of a company shall be deemed to be controlled if the latter has the power, without the consent or concurrence of the other person, to appoint or remove the holders of all or majority of the directorships.

A company shall be deemed to have the power to appoint a person as a director in other company in the following cases:
  • Where a person cannot be appointed thereto without the exercise in his favour by the company of such a power of appointment.
  • Where a person's appointment or directorship follows necessarily from his appointment as director, or manager of, or to any other office or employment in the company.
  • Where a directorship is held by an individual nominated by the company or a subsidiary thereof.

In determining whether one company is a subsidiary of another, following shall be disregarded:
  • Any shares held or power exercisable by the other company in a fiduciary capacity shall be treated as not held or exercisable by it.
  • Any shares held or power exercisable in a company by any person under provisions of its debentures or of a trust-deed for securing any issue of such debentures shall be disregarded.
  • Any shares held or power exercisable by, or by a nominee for a company or its subsidiary, other than as in clause (2) above, shall be treated as not held or exercisable by it if the ordinary business of that other company is lending money and the shares are held or power is exercisable only by way of security in the ordinary course of business.

However, shares held or power exercisable by any person as a nominee of that other company shall be treated as held or exercisable by the said company. Thus, the shares held or power exercisable by a subsidiary shall be treated as 'held' or 'exercisable' by the holding company. For example, 'B' and 'C', are subsidiaries of company 'A', and both of them hold together more than half of the equity share capital of company 'D' then 'D' shall be deemed to be a subsidiary of 'A' although it has not made any direct investment nor 'B' or 'C' singly hold more than 50% shares, in the company 'D'

Classification on the Basis of Ownership
On the basis of ownership, a company may be:
  1. Government company
  2. Non-government company

Government Company
Section 617 defines a 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 of a Government Company"].

Government Companies are as much governed by the provisions of the Companies Act as any other company; but by virtue of s.620, the Central Government may direct that any of the provisions of the Act will not apply to them or shall apply only with such exceptions, modifications and adaptations as may be notified by the Government. However, the Central Government cannot exempt the Government Companies from the provisions of Ss.619 and 619-A which specifically deal with such companies.

Section 619 provides that the auditor of a Government Company shall be appointed or re-appointed by the Central Government on the advice of the Comptroller and Auditor-General of India. The ceilings on the number of audits to be undertaken by an auditor under s.224 are equally applicable to audit of Government Companies. The Comptroller and Auditor General of India have the power to direct the manner in which the accounts are to be audited and to give instructions to the auditor in regard to any matter relating to the performance of his functions. He is also empowered to get a supplementary test audit of accounts conducted by persons authorised by him.

The auditor of the Government Company has to submit a copy of his audit report to the controller and auditor general who has the right to comment upon, or supplement the audit report in such manner as he thinks fit. Such comments or supplementary audit report must be placed before the annual general meeting of the company at the same time and in the same manner as the auditor's report.

Section 619-A provides that the Central Government must place before both Houses of the Parliament, an annual report on the working and affairs of each Government Company to be prepared within three months of its annual general meetings, together with a copy of the audit report and any comments upon or supplement to, such audit report, made by the controller and auditor general of India. Where a State Government is a participant in a Government Company, this report has, likewise, to be placed before the State Legislature.

Section 619-B provides that the provisions of s.619 as stated above also apply to a company in which the Central Government or any State Government or any Government Corporation hold either singly or jointly not less than 51% of the paid-up share capital.

Foreign Company
Foreign Company is a company incorporated in a country outside India and has a place of business in India.

However, where not less than 50% of the paid-up share capital (whether equity or preference or partly equity and partly preference) of a company incorporated outside India and having an established place of business in India, is held by one or more citizens of India or by one or more Indian bodies corporate, such company shall comply with such of the provisions of the Act as may be prescribed with regard to the business carried on by it in India.

Section 592 requires that every foreign company which establishes a place of business in India, must, within 30 days of the establishment of such place of business, file with the Registrar of Companies at New Delhi and also the Registrar of Companies of the State in which such place of business is situated:
  1. A certified copy of the memorandum and articles of the company and if they are not in English, then a certified translation thereof;
  2. the full address of the registered office of the company;
  3. a list of the directors of the company and its secretary with full particulars of their nationality, address and business or occupation;
  4. the names and addresses of one or more persons resident in India who are authorised to accept service of process or notice or other documents to be served on the company; and
  5. the address of the principal place of business in India

Section 593 provides that in case of any alteration in any of the above particulars, the company has to file with the Registrar of Companies a return of such alteration within the prescribed time.

Section 594 makes the application of the provisions regarding books of account to be kept by a company under s.209 to a foreign company so far as it concerns its business in India. The books of account must be kept at the principal office in India and three copies of balance sheet, profit and loss account and other documents must be delivered to the Registrar with a list in triplicate of all places of business in India.

Section 595 requires a foreign company to exhibit conspicuously on the outside of every office or place of business in India the name of the company and 'limited' or 'private limited,' if it is a limited company and the country in which it is incorporated in English as well as in the local languages in general use in the locality in which the office is situated. Also the prospectus issued in India must contain this information.

Section 596 provides the procedure for service of any process, notice or other documents on a foreign company and it shall be deemed to have been served, if addressed to any person whose name has been delivered to the Registrar of Companies under s.592.

Section 597 provides that the foreign company must also deliver the documents under s.592 to the Registrar of Companies, New Delhi.

Section 598 provides penalty for default in complying with any of the foregoing requirements. The company and every officer of the company who is in default shall be punishable with fine up to 10,000 and in the case of a continuing default with an additional fine up to 1000 for every day during which the default continues.

Section 599 provides that the foreign company which fails to comply with the foregoing provisions is prohibited from enforcing any contract by way of a suit, set-off or counter-claim, although it will be liable to be sued in respect of any contract it may have entered into.

Section 600 makes the application of the following Sections to a foreign company: Sections 124145; 118; 209; 159-160; 209A; 601-608.

Section 584 provides for the winding up of a foreign company. Where a foreign company, which has been carrying on business in India, ceases to carry on such business in India, it may be wound up as an unregistered company under Part X (Ss.582-590), notwithstanding the fact that the company has been dissolved or ceased to exist under laws of the country in which it was incorporated.

One Man Company
A member may hold virtually the entire share capital of a company. Such a company is known as a 'one-man company'. This can happen both in a private company and a public company. The other member/members of the company may be holding just one share each. Such other members may be just dummies for the purpose of fulfilling the requirements of law as regards minimum membership [Salomon v. Salomon & Co. Ltd.].

Incorporation of Company
Section 12 provides for incorporation of companies which need not have a share capital. A guarantee company is an example of a company without a share capital. However, with the introduction of the requirement of minimum paid up share capital for a public company and a private company, the concept of companies without a share capital has become redundant since 2000. However, a company registered under section 25 is not required to have minimum paid up share requirement. [s. 3(6)]

Illegal Association
Any company association or partnership carrying on banking business with more than ten members or carrying on any other business with more than twenty members that has for its object the acquisition of gain, without being registered under the Companies act, shall be considered an illegal association.

Exceptions:
Joint family carrying on a business as such is not illegal association.
Stock exchange is not considered an illegal association since it is not formed for the purposes of carrying on any business.

Disabilities of an Illegal Association:
  • It cannot enter into any contract, nor can it sue any member or outsider.
  • It cannot contract any debts.
  • It has no legal existence. However, it can get registered any time and become legal.
  • Every member shall be personally liable to unlimited extent for all liabilities incurred in such business.
  • Every member shall be punishable with fine which may extend to 10,000.
  • It canno be wound up under the Act.
  • Its members have no remedy against each other for contribution or apportionment in respect of partnership dealings and transactions.
Written By: Debesh Pattnaik, a student of BBA.LLB (HONS) Siksha 'O' Anusandhan National Institute of Law, Bhubaneswar

Law Article in India

Ask A Lawyers

You May Like

Legal Question & Answers



Lawyers in India - Search By City

Copyright Filing
Online Copyright Registration


LawArticles

How To File For Mutual Divorce In Delhi

Titile

How To File For Mutual Divorce In Delhi Mutual Consent Divorce is the Simplest Way to Obtain a D...

Section 482 CrPc - Quashing Of FIR: Guid...

Titile

The Inherent power under Section 482 in The Code Of Criminal Procedure, 1973 (37th Chapter of t...

Increased Age For Girls Marriage

Titile

It is hoped that the Prohibition of Child Marriage (Amendment) Bill, 2021, which intends to inc...

Sexually Provocative Outfit Statement In...

Titile

Wednesday, Live Law reported that a Kerala court ruled that the Indian Penal Code Section 354, ...

UP Population Control Bill

Titile

Population control is a massive problem in our country therefore in view of this problem the Ut...

Privatisation Of Government Sector

Titile

Privatization of presidency Sector Although in today's time most of the services provided in ou...

Lawyers Registration
Lawyers Membership - Get Clients Online


File caveat In Supreme Court Instantly