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Company Law : Study Material for LL.B. Course
COMPANY LAW
CHAPTER -I
INTRODUCTION
The Company Law in India is originally borrowed from the English Company Law. In India the first company law legislation was Joint Stock Companies Act,
- Later it was substituted by The Indian Companies Act 1913. The working of the Indian Companies Act 1913 was found to be highly unsatisfactory, it was also repealed and the present Companies Act 1956 has been adopted. The Companies Act 1956 was modelled on the English Companies Act 1948 and its provisions were incorporated on the recommendation of the Bhabha Committee which was constituted by the Government of India to look into the working of the existing company law and to suggest appropriate changes. MEANING AND DEFINITION OF COMPANY Literally the term Company means a group of or an association of persons who have agreed to undertake a predetermined venture. The word “company’ is derived from the Latin “Com and Panis”. The word Com means with or together and the word Panis means bread ie., it referred to an association of persons who took their meals together. The word “company” has assumed great importance as it denotes a joint stock enterprise in which the capital is contributed by a large number of people. Company denotes an association of like minded persons formed for the purpose of carrying on same business or undertaking. In Smith v. Anderson, (1880) 15 Ch.D. 247, it was observed that “a company, in broad sense, may mean an association of individuals formed for some purpose.” According to Chief Justice Marshall of USA “a company as a person ,artificial, invisible, intangible and existing only in the eyes of the law”
Company Law : Study Material for LL.B. Course LINDLEY’S DEFINITION According to Lindley a Company means “an association of many persons who contribute money or money’s worth to a common stock and employ it in some common trade or business and who share the profit or loss arising there from. DEFINITION UNDER COMPANIES ACT Section 3(1)(i) of The Companies Act 1956 defines the term company. As per Section 3(1) (i) of the Act a Company means “a company formed and registered under the Companies Act”. A company is called a body corporate or corporation 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 word “corporation” is derived from the Latin term “corpus” which means “body”. Accordingly, “corporation” is a legal person created by the process other than natural birth. It is, for this reason, a company is called artificial person. This corporate being is capable of enjoying many of the rights and incurring many of the liabilities of a natural person. ESSENTIAL CHARACTERISTICS OF A COMPANY The essential characteristics of an incorporated company are following. SEPARATE LEGAL ENTITY It is settled legal position that an incorporated company is a legal person distinct from its members who constituting it.. The decision of the House of Lords in Salomon v. Salomon and co. Ltd is a well known authority on this subject. SALOMON V.SALOMON AND CO.LTD 1897 AC 22 In this case Salomon who carried on a prosperous leather business sold his concern for the sum of £30,000 to a company which he formed consisting of himself, his wife, daughter and his four sons as its shareholders. His daughter, wife and four sons took £1 share each whereas Salomon took 20,000 shares of £1 each and debentures worth £10,000. The debentures were secured by a floating charge on
Company Law : Study Material for LL.B. Course law. Gower has rightly observed that not even a hydrogen bomb could have destroyed a company.
3. LIMITED LIABILITY The company being a separate entity, carrying on its own business , the members are not liable for its debts. Generally, the liability of company’s members is limited where the company is limited by shares. The liability of the members of a company is limited to the extent of the nominal value of the shares held by them. In no event can a shareholder be asked to pay anything more than the unpaid value of his shares. In the case of a company limited by guarantee, the members are liable only to the extent of the amount guaranteed by them and not beyond, and only when the company goes into liquidation. 4. TRANSFERABILITY OF SHARES The shares of joint stock companies are freely transferable. In the case of a private company, the Act requires it to put certain restrictions on the transferability of shares. Every member owing fully paid-up shares is at liberty to dispose them off according to his choice but subject to the articles of the company. Any absolute restriction on the right to transfer shares is void. 5. SEPARATE PROPERTY As a legal person, the company is entitled to own and hold property in its own name. No member can claim ownership of any item of the company’s assets. 6. COMMON SEAL Every company registered under the provisions of the Companies Act shal have a Common seal. This common seal is required to be affixed to all documents, deeds, contracts communications etc in order to bind the Company. But now the same is possible through Digital Signature. 6. POWER TO SUE AND BE SUED A company, being a body corporate can sue and be sued in its own name.
Company Law : Study Material for LL.B. Course
7. PERMANANCY OF CAPITAL AND PROTECTION TO CREDITORS Though the Companies Act allows companies to purchase its own shares, known as “buyback”, it is subject to various restrictions as provided under the Act. This provides permanency of capital collected and stability to the company and protection to some extent to the creditors of the company. IS COMPANY A CITIZEN? In ST Corporation of India Ltd v. Commercial Tax Officer AIR 1963 SC 1811 Supreme Court held that company is not a citizen either under the provisions of Constitution or under Citizenship Act, 1955. But on the other hand an incorporated company has Domicile and Nationality.
Company Law : Study Material for LL.B. Course 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. [Section 12(1)] 2. Maximum number : There is no restriction on maximum number of members in a public company. Whereas the maximum number cannot exceed 50 in a private company. [Section 3(1) (iii) (b)]. 3. Number of directors: A public company must have at least 3 directors (Section 252(1)), whereas a private company must have at least 2 directors. [Section 252(1)]. 4. Restriction on appointment of directors: In the case of a public company, the directors must file with the Registrar consent to act as directors or sign an undertaking for their qualification shares (Section 266(1). The directors of a private company need not do so. (Section 266(5) (b)). 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. [Section 3(1) (iii) (c)]. 6. Transferability of shares: In a public company, the shares are freely transferable (Section 82). In a private company the right to transfer shares is restricted by the Articles. [Section 3(10(iii) (a)]. 7. Special privileges: A private company enjoys some special privileges. A public company enjoys no such privileges.
Company Law : Study Material for LL.B. Course
8. Managerial remuneration: Total managerial remuneration in a public company cannot exceed 11% of the net profits. No such restriction applies to a private company.
- Minimum Capital A public company must have a minimum of Rs. 5,00,000 as capital. A private limited company must have a minimum capital of Rs. 1,00,000.
- Quarum If the articles of a company do not provide for a larger quarum 5 members personally present in the case of public company are quarum for a meeting of the company. Two in the case of private company. IV. 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. V. 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.
Company Law : Study Material for LL.B. Course with limited liability without being required to use the word “limited” or the word “private limited” to their names. The central government may grant such a licence if: (i) it is intended to form a company for promoting commerce, art, science, religion, charity or any other useful object; and (ii) The company prohibits payment of any dividend to its members but intends to apply its profits or other income in promoting its subject. On registration, the Association enjoys all the privileges of a limited company and is subject to all its obligations, except, those in respect of which exemption by a special or general order is granted by the Central Government. The Central Government has issued some notifications exempting certain companies under Section 25. The Central Government may, however, at any time revoke the licence upon revocation the company will lose the exemptions granted by the Central Government. IX. FOREIGN COMPANIES A “foreign company” is a company which is incorporated in a country outside India under the law of that country and has established a place of business in India. The Act lays down 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 Registrar of Companies at New Delhi and also with the Registrar of Companies of the State in which such place of business is situated: a. a certified copy of the charter, statutes, or memorandum and articles of the company, or other instrument constituting or defining the Constitution of the
Company Law : Study Material for LL.B. Course company, and if the instrument is not in the English language, a certified translation thereof; b. The full address of the registered or principal office of the company. c. a list of the directors and secretary of the company containing particulars of their names, nationality, addresses and business occupations; d. the names and addresses of one or more persons resident in India who are authorised to accept service of process and any notices or other documents required to be served on the company; and e. the full address of the principal place of business in India. X. HOLDING AND SUBSIDIARY COMPANIES A company which controls another company is called the “holding company” and the company so controlled is known as “subsidiary company”. Holding and subsidiary companies are relative terms. A company is a holding of another if the other is its subsidiary. Section 4 of the Companies Act,1956 provides the ways by which the holding company may exercise its control on the subsidiary company. They are following,
- 1.Where the composition of the Board of Directors of the company is controlled by another company.
- If the company holds the majority of the shares of another company.
- If the company is a subsidiary of any company which is in turn a subsidiary of another company. Eg: Company B is a subsidiary of company A and company C is a subsidiary of company B. Company C is a subsidiary of company A, if Company D is subsidiary of company C, Company D will be subsidiary of Company B and consequently also of Company A.
Company Law : Study Material for LL.B. Course The auditor of a Govt. company is appointed or re-appointed by the Central Govt. on the advice of the Comptroller and Auditor General of India. He is required to submit a copy of his audit report to the Comptroller and Auditor General of India.
2. Audit report to be placed before Parliament or State Legislative Bodies. 3. Certain provisions of the Companies Act not to apply The Central Govt. may, by notification in the official gazette, direct that any of the specified provisions of the Companies Act 'shall not apply to any Govt. company. XIII. ONE- MAN COMPANY This is a company (usually private) in which one man holds practically the whole of the share capital of the company and in order to meet the statutory requirement of minimum number of members, some. Dummy members who are mostly his relations or friends hold one or two shares each. The dummy members are usually nominees of the principal shareholder who is the virtual owner of the business and who carries it on with limited liability. E.g.: A private company is registered with a share capital of Rs.5 lakhs divided into 5,000 shares or Rs.100/each. Of these shares 4,999 are held by A and one share is held by A's wife B. This is a one-man company. A one-man company, like any company, is a legal entity distinct from its members. Eg: Salomon v. Salomon &Co:Ltd.189. XIV. ILLEGAL ASSOCIATION Section 11 of the Companies Act prohibits the formation of illegal association. A company, association or partnership consisting of more than 10 persons for the purpose of carrying on banking business and of more than 20 persons for the purpose of carrying on any other business with the object of earning profits can be legally formed only when it is registered under the Companies Act,
- If the number of members in an association or partnership exceeds this
Company Law : Study Material for LL.B. Course statutory limit and it is not registered under the Companies Act, is called illegal association or larger partnership. However, an association of more than 20 persons which is formed not for acquisition of gain but for some other purpose such as promotion of art, charity, religion, science etc. does not require registration. Section 11 does not apply to a joint family carrying on a business but where business is carried on by two or more joint families Section 11 applies. CONSEQUENCES OF ILLEGAL ASSOCIATION
- It is not recognised by law; hence it has no legal existence.
- It cannot enter into contracts.
- It cannot sue and be sued.
- It cannot enforce contractual obligations.
- It can be dissolved through court or at instances of the creditors or members.
- Members are personally liable for all liabilities incurred in business.
- Every member shall be punishable with fine which may extend to one thousand rupees.
- It have no separate legal entity and perpetual succession. XV. STATUTORY COMPANY A Statutory Company means a company formed by a special Act of any State Legislature or by any Special Act of Parliament. These statutory companies are also called as “Public Corporations”. A statutory company does not require any articles of association or Memorandum of Association, like the companies registered under the Companies Act, 1956.Statutory companies are owned either by the Central Government or By State Government. Statutory Companies are autonomous and comes within the purview of Article 12 of the Constitution of India. Eg; RBI, LIC, ONGC, FCI Etc.
Company Law : Study Material for LL.B. Course
3. Liability of Members The liability of members of a company (except an unlimited company is limited whereas the partners have unlimited liability towards payment of firm’s debts and liabilities. 4. Management Company management is entrusted with its Directors, Managing Director or Managers and its shareholders have no right to take part in the management. On the other hand every member of a partnership may take part in its management unless the partnership agreement provides otherwise. 5. Transferability of Interest Shares in a company are freely transferable unless its articles otherwise provide. But in a partnership firm a partner can transfer his shares only with the consent of the other partners. 6. Authority of Members Each partner is an agent of the firm in carrying out the day to day business of the firm. In the contrary shareholders are not an agent of the company i.e., company having distinct personality different from its members. 7. Powers A firm do anything which the partners agree to do and there is no limit to its activities; a company's powers are limited to those allowed by the object clause in the Memorandum of Association. 8. Insolvency of Firm & Winding up of Company The insolvency of a firm means insolvency of all the partners. whereas the winding up of an insolvent company does not make the members insolvent. 9. Dissolution Unless a partnership is entered into a fixed period, it may be dissolved at any time by any partner, and every partnership will automatically be dissolved by the
Company Law : Study Material for LL.B. Course death or insolvency of a partner. A company has a perpetual succession. No personal circumstance affecting a member, such as death, insolvency or unsoundness of mind, will affect its existence. It comes to an end only when it is wound up according to the provisions of the Companies Act.
10. Number of Members The maximum number of partners in a firm carrying on banking business can be 10 and in any other business 20. The maximum number of shareholders in a Private Co. is 50. There is no statutory limit to the maximum number of members in case of a Public Co.
Company Law : Study Material for LL.B. Course JONES V LIPMAN -1962 ALL.ER 442 'L' agreed to sell certain land to ‘J’. He subsequently changed his mind and to avoid the specific performance of the contract, he sold it to a company which was formed specially for the purpose. The company had ‘L' and a clerk of his solicitors as the only members. 'J' brought an action for the specific performance against 'L' and the company. The court looked to the reality of the situation ignored the transfer and ordered that the company should convey the land to 'J'.
3. WILFUL OMISSION OF A LEGAL OBLIGATION Where the use of the incorporated company is being made to avoid a legal obligation, the court may proceed on the assumption as if no company existed. GILFORD MOTOR CO. LTD. V. HORNE - H, a former employee of a company, was subject to a covenant not to solicit its customers. He formed a company to carry on a business which, if he had done so personally, would have been a breach of the covenant. An injunction was granted against both 'H' and the company to restrain them from carrying on the business. 4. COMPANY ACTING AS AGENT OF THE SHAREHOLDERS Where a company is acting as agent for its shareholders, they will be liable for the acts of the company. In RE F.G. FILMS LTD. (1953) 1 ALL.ER 615 , an American company financed the production of a film in India in the name of a British company. The president of the American company held 90 percent of the capital of the British company. The Board of Trade of Great Britain refused to register the film as a British film. Held, the decision was valid in view of the fact that British company acted merely as the nominee of the American company. 5. DETERMINATION OF THE CHARACTER OF A COMPANY The court is required to lift the veil of corporate personality to examine the realities that lie behind the company. The character of a company cannot be determined without lifting the corporate veil. The question is whether a company is
Company Law : Study Material for LL.B. Course to be regarded as an anemy company in time of war. An English leading case in this regard is the following, DAIMLER CO. LTD. V. CONTINENTAL TYRE & RUBBER CO. LTD. (1916) 2 AC 307 A company was incorporated in England for the purpose of selling in England tyres made in Germany by a German company which held the bulk of shares in the English company. The holders of the remaining shares, except one, and all the directors were Germans, resident in Germany. After the out breack of war between England and Germany an action was initiated in the name of English company for payment of trade debt. Whereas Daimler Co: Ltd pleaded that the Respondent company was an alien enemy company and the payment of the debt would be a trading with enemy. It was held that the respondent company assumed an enemy character and was, therefore, incapable of suing and that any payment to it would be illegal as a trading with the enemy. STATUTORY EXCEPTIONS
1. Number of members below the statutory minimum If a company carried on business for more than 6 months after the number of its members has been reduced below 7 in case of a public company or two in case of a private company, every person who knows this fact and is a member during the time that the company so carries on business after the 6 months, is severally liable for all the debts of the company contracted during that time, i.e. after 6 months. 2. Mis-description of Company’s Name Where an officer or an agent of a company does any act or enters into a contract without fully or properly mentioning the company’s name and address of its registered office he shall be personally liable. Where a bill of exchange or promissory note is signed by an officer of a company or any other person on its behalf, without mentioning this fact that he is signing it on behalf of the company, he is personally liable to the holder of the Bill or Note, unless the company has already paid the amount.
