KINDS OR TYPES OF COMPANIES

KINDS or TYPES  OF COMPANIES

               

1)            According to mode of incorporation

1.    Under the special Act of Legislature : Incorporated under the special Act of central or state legislature called ‘Statutory Companies’ such as LIC, RBI, UTI etc.

2.    Under the Companies Act. :  Known as ‘Registered Companies.’

2)            On the basis of number of its members

1.    Private Company  Section 3 (1)(iii) A Company which satisfies the following conditions

·            Minimum paid up capital =1 lakh or as prescribed

·         Restriction on transferability of shares= some restrictions in a Company limited by shares in the right of transferability of shares in the Company

·         Restriction on number of members= limited to 50 except persons who are/ were in employment of Company and were members of Company during employment and continued to be members after employment ceased. Joint holders of shares be treated as single member for the purpose.

·         Prohibition on issue of Prospectus= prohibits any invitation to public to subscribe for any shares/ debentures of the Company. Prohibitions on any invitation or acceptance of deposits from persons other than members, directors or their relatives.

·         Minimum number of members = 2

·         A private Company must add the word ‘Private’ or any abbreviation thereof in its name.

A private Company limited by shares must have articles containing aforesaid restrictions, limitations and prohibitions.

2.    Public Company Section 3(1)(iv) : A Company which

·         Is not a private Company

·         Has minimum paid up capital of Rs 5 lakhs or as prescribed

·         Is a private Company which is a subsidiary of a Company other than a private Company

·         Maximum number of members =7

3)            On the basis of liability of members

1.    Company limited by shares

A Company having liability of its members limited by the memorandum to the amount, if any, unpaid on shares held by them is termed as a Company limited by shares. Most Companies in India are of this type.          

2.    Company limited by guarantee

A Company having liability of its members limited by memorandum to the amount members undertake to contribute to the assets of Company ‘during winding up’ is termed as Company limited by guarantee. The articles shall state the number of members with which the Company is to be registered.

3.    Unlimited Company

A Company not having any limit on liability of its members is termed as unlimited Company. The articles shall state the number of members with which the Company is to be registered and in case of Company having share capital, the amount of share capital. Such Companies are rare these days.

4)            Un-registered Companies

It includes partnerships, association of persons or Companies consisting of more than 7 members at the time of winding up petition.

5)            Foreign Companies (Section 591)

A Company incorporated outside India which has ‘a place of business in India’. The terms place of business has been judicially construed. The test is to ascertain whether business is carried on here at a defined place.

Case Law: Pratap Singh V/s bank of America ( Bom HC)

Held= A foreign Company cannot be sued in India for a cause of action arisen wholly outside India, even if it has a place of business in India.

Babulal Chowkhani V/s Caltex (India) limited  (Cal HC)

Held= Any failure by a foreign Company to comply with the provision of part XI of the Companies Act shall not affect the validity of any contract/ dealing/ transaction entered into by the Company.

Documents to be delivered by the foreign Company

a.       Certified copy of charter, status, memorandum  and articles , and other relevant instrument defining the constitution of Company. If not in English, certified translation there4of.

b.      Full address of registered and principal office of Company

c.       List of directors and secretary of Company with particulars

d.      Name and address of persons resident in India authorized to accept on behalf of the Company service of process/ notices / other documents.

e.      Full address of office of Company deemed to be the principal place of business in India.

S. 593 = Any alteration in the above particulars must be notified to the registrar within the prescribed time.

S. 594 = Accounts of foreign Company : Copies of Balance sheet/ P& L A/c and other documents required under the Act along with list of all places of business established in India

S. 598= Penalties and disability – fine up to Rs.  10,000

In case of continuing offence, additional fine up to Rs. 100 per day during which default continues.

S. 599= Company prohibited from enforcing any contract by way of suit, set off or counter claim. The section does not create a right to sue a foreign Company nor does it extinguish or limit such right.

6)            Government Companies

Any Company in which not less than 51 % pf paid up share capital is held by the central government or state government/s or partly by central government and partly by one or more state governments and includes a subsidiary Company of a government Company.  The govt. co. is not a department or extension of the State.

Special provisions relating to Government Companies:

·         Audit: S. 619-     Auditor appointed/ reappointed by CAG. Report to CAG who shall have to comment upon or supplement it.

·         Annual reports S 619 A- Govt. Company shall cause an annual report on working of affairs of Company within three months of AGM.

The annual reports be laid before both houses of parliament or State legislature, as the case may be.  With a copy of audit report and comments or supplements thereto made by the CAG.

Application of Company’s Act: Govt Company to be registered under the Company’s Act. The Govt by notification in the Official Gazette direct that any provision of the ACT shall 1) not applied to Govt Company 2) Apply with exceptions, modifications and adaptations specified in the notifications.

7) Holding Company and Subsidiary Company :  Sec 4(4)

4(1): The company which controls the composition of BOD is called the holding Company and the other Company is called the subsidiary Company .4(2): the composition of Company’s  BOD shall be deemed to be controlled by another Company if that Company can appoint or move or majority of directorship without consent or concurrence.

Wherein Company holds majority of shares in another Company, the former is holding Company and latter subsidiary.

A subsidiary Company of another which itself is subsidiary of another company. The former shall be the subsidiary of latter Company .

Advantages of private Company :

1) Number of members minimum two.

2) Provisions relating to prospectus not applicable

3) Minimum  subscriptions not required

4) No need of a certificate of commencement of business.

5) Exemptions relating to directors.

·         Only two directors

·         Directors need not retire by rotation.

·         Fourteen days notice for appointment of new director not applicable

·         Sec 259 not applicable unless it is a subsidiary Company of public Company

·         Requirement of written consent of first appointment of director to act as such within 30 days of appointment not applicable, unless subsidiary of public Company .

·         Interested director of Private Company, which neither a subsidiary nor a holding Company can participate and vote in boards proceedings.

6) No need of holding statuary meeting and file a statuary report.

7) Further issue of capital to outsiders who are not members

8) Sec 416 does not apply.

9) Disclosure of interest: Interested director under no obligation to retire from meeting of board at which matter of his interest discussed.  He can participate and exercise his vote.

 Disadvantages of private Company :

1) Cant issue share warrants payable bearer.

2) Sec 159 to file annual list of members and summary with a registrar. Also to send a certificate to the effect that Company has not since date of last return issued any invitation to public to subscribe to shares of debentures.

3) A member of private Company cannot appoint more than one proxy to attend and vote in Company meeting.

4) To send as certificate to registrar to the effect that

     a) Its annual turnover in preceding three years never reached one crore.

     b) It did not hold 25% or more of paid up capital of one or more public Companies.

 c) Since its last GM capital no body corporate has held 25% or more of its paid up share capital.

 Failing which it shall cease to be a private company forth with.

8) Investment Company : Proviso to sec 372 (1) A Company whose principle business is accusation shares , stock, debentures or other securities

Whether a Company is investment Company or not is a question of fact which has to be decided in narration to actual business transacted by the Company .

The term whose principle business is acquisition of shares implies that the Company’s expected to hold shares etc acquired by it for a reasonable time.

9) Finance Company : A non-banking Co. which is a financial institution within the meaning of S.45(1)(c) of RBI Act 1934.  Thus a financial institution is a non banking institution which carries on any of the following activities as its business or part of its business.

·         Financing, by making loans advances or otherwise.

·         Acquisition of shares, stocks, debentures or securities issued by govt. or local authority or other marketable securities of similar nature.

·         Carrying any insurance business.

·         Managing conducting or supervising agency of chits etc under the law in force.

·         Collecting money by subscription or sale of units or awarding prices gifts whether in cash or kind. According to Sec 4(a) of Company Act following are regarded as public financial institutions. ICICI, IFCI, IDBI, LIC, UTI.

·         Central Govt. by notification in official gazette specify any other institution to be public financial institution provided a) Constituted by or under central govt. Act be not less than 51% of its share capital held or controlled by central govt.

CHARITABLE CONTRIBUTIONS

Political Contributions :

DIVIDEND

BORROWING POWER OF COMPANY  DEBENTURE AND CHARGE

Allotment of shares

LAW OF PROSPECTUS IN COMPANY LAW 

Relationship between MOA and AOA.

DOCTRINE OF ULTRA VIRES

CONVERSION OF PRIVATE Company TO PUBLIC Company

KINDS OR TYPES OF COMPANIES

COMPANY LAW:-Characteristics of Company

COMPANY LAW:-Characteristics of Company

Unit 1

Company Definition: Section 3 (1), Companies Act. A company is a company formed or registered under the companies act or an existing company. According to section 3(1)(i)(ii), an existing Company is a Company formed and registered under any of the former Companies Act.  According to Honey, a Company is an incorporated person

                                I.            Which is an artificial person

                              II.            Created by law

                            III.            Having a separate entity

                            IV.            With a perpetual succession and

                              V.            A common seal.

The above definition is more comprehensive.

Characteristics of Company

1)            Incorporated Association:  Company must be incorporated under company’s Act . Compulsory for all associations Or partnership of more than 10 members . In case of banking business or Section 20, In case of other business to register under the companies Act.

2)            Artificial Legal person:

·         Created by law and law alone can dissolve it.

·         Invisible and intangible.

·         Exist in eyes of law.

·         Purchase and sell property

·         Can sue and be sued by others.

·         Enter into contracts through natural persons however does not possess physical attributes of natural person.

3)            Separate Legal Entity:

Company is separate legal entity in the eyes of law as distinguished from its members. It does not lose individuality by issuing bulk of its capital to one person only. It can sue and be sued by outsiders as well as members.

Case Laws :

·         Solomon Vs Solomon and company

·         Lee Vs Lee Air farming Ltd

·         Telco Vs State of Bihar SC

4)            Perpetual Existence: Life of company does not depend upon the death, insolvency or retirement of any or all share holders or directors of company. The provision of transfer and transmission of shares preserve the perpetual existence of Company.  Company’s perpetual existence is recognized in Section 34 (1) and (2) of Companies Act.

(i)            On registration of memorandum of Co. registrar shall certify that Company is incorporated.

(ii)           From the date of incorporation subscribers of memorandum and other persons as members shall be a body corporate.

5)            Common Seal :

Company being as separate legal entity bound by documents which bear, inter alia, its signature, that is common seal. Any document bearing common seal of Company duly witnessed by at least two directors is binding on the company.

6)            Limited Liability : There may be :

·         A company limited by guarantee.

·         A Company with unlimited liability.

·         A Company with limited liability.

Liability of members of Company with limited liability is limited to the extent of amount unpaid or shares held by them.

7)            Transferability : In case of public limited Company shares are freely transferrable without permission from Company or other members. In case of private Ltd Company there are some restrictions on transferability of shares.

Advantages of Incorporation:

·         Independent Corporate Existence Solomon Vs Solomon.

·         Limited liability: share holder liability is not more than the nominal value of shares held by them.

·         Separate Property: Company is capable of owning, enjoying and disposing of property in its own name. The members have no direct proprietary right to Companies property.

·         Perpetual Succession: continuous existence. Members of Company may come and go but Company can go on forever.

·         Capable of suing and being sued. Company has a right to seek damages where a defamatory material published about it affects its business.

·         Transferrable shares: Legally and practically freely transferrable in case of limited Company .

·         Management separate from capital: Company law provides for separation for risk investment via purchase of shares from the management.

·         Finances: Company is the only form of business organization which raises capital from public. Public financial institutions willingly lend their resources to the companies.

Disadvantages of Incorporation:

1)            Formality and expense: Number of formalities to be completed:

·         To pay stamp duty, registration fee, filling fees etc.

·         To work as per provisions of Companies Act.

·         To maintain elaborate Account Books

·         To be audited annually

·         To send annual reports to share holders and registrars of Companies

·         Winding up also expensive

2)            Loss of Privacy: Public Ltd Company required to publish its constitution, capital structure, final Accounts etc. Thus loss of privacy.

3)            Corporate Governance : In many cases management has poor track record of corporate governance. Moreover lack of personal interest and motivation results in wastages and inefficiency of management.

4)            Lifting the Corporate Veil : A company has a separate legal personality distinct from its members. The Solomon’s case well established the existence of veil of corporate personality. But there are exceptions to this fundamental principle of corporate personality where veil is lifted and identity of members is revealed.  Corporate veil is said to be lifted when court ignores the Company and concerns directly with the members or managers.

Thus, lifting of corporate veil means disregarding the corporate entity and paying regard instead to the individual members behind the legal façade.

It must be noted that there is no general principle covering all exceptions.

The Circumstances under which corporate veil lifted may be classified into the following:

1) Under Judicial interpretation

2) Under Statutory Provision

Under Judicial interpretation: Determination of enemy character of company.

Case Law: Diamler Company Vs Continental tyre and Rubber Company (AC Decision) (Corporate Veil can be lifted for determination of character)

A Private Company incorporated in England for selling tyres manufactured in Germany by German Company. Share capital of 25,000 Shares of S1 each.  Members of Company –

German Co. 23,398 shares                           German National 1601 shares                     British National 1 share

During First World War , English Company brought an action to recover trade debt. The house of lords held- Company though incorporated in  UK was an English Company ; but its real character was German. Its directors , share holder except one , its actual beneficiaries were Germans who had become enemies of England in war. The Company was not allowed to proceed with the action to recover trade debts.

The court laid down that a Company may assume enemy character when person “in de facto control” of its affairs are : A) residents in enemy country or B) residents acting under control of enemies.

Tax Evasion: If a company is used for tax evasion or circumvent tax obligation the courts have power to disregard the corporate veil of Company .

CASE LAW: In re Sir Dinshaw Manekjee The assessee Sir Manekjee, formed four private ltd companies and transferred his investments in parts to each of them in exchange of their shares. Companies were doing no business apart from receiving dividends handing them back to assessee loans. Thus assessee divided his income in four parts to reduce his tax liability. He was assessed for ‘ Super tax’ deeming that profits of Company were his profits and alleged loans were not genuine loans. The courts disregarded the veil of incorporation and found out that the Companies was formed as the means of avoiding super tax and it was nothing more than the assessee himself.

The Co. was formed by assessee purely and simply as a means of avoiding tax. It did no business but to ostensibly to receive dividends and interests and to hand them over to the assessee as pretended loans.

Fraud or Improper Conduct: The courts will refuse to hold the veil of incorporation where it seems Company is a cloak or sham to defraud creditors or to avoid any legal obligation.

CASE LAW: Gillford Motor Company Vs Horme ( Court of appeal decision)

 Defendant, a former employee of plaintiff Company , was covenanted  not to solicit its customers. He formed a Company which solicited its customers. Held: a Company formed as a device and as a mere cloak or sham for enabling the defendant to commit a breach of its covenant with plaintiff.

Agency or trust: A Company sometimes be regarded as an agent or trustee of its members or another Company and therefore deemed to have lost its individuality in favor of principal.

Case law : LIC vs Escorts (SC)

 A group of 13 Companies incorporated abroad separately applied for permission (as provided) with FERA for investment in Indian Companies. All these Companies purchased shares of Escorts Ltd. . More than 60 % shares of these 13 Companies held by a trust of which Mr. Swaraj Paul and his family member were trustees.

SC Held= FERA itself permits the veil to be lifted fro knowing whether 60% holding makes the company belong to non resident Indians.

Avoidance of Welfare Legislation :

Case Law: Workmen Vs. Associated Rubber Industries. (SC)

A Company created a subsidiary and transferred its investment holdings in it to reduce liability to pay bonus to workers. Subsidiary Company had no assets of its own except those transferred to it by the principal Company and assets except receiving dividend from shares transferred to it. The purpose was to reduce the gross profit of the principal Company.

The court brushed aside the separate existence of subsidiary Company and observed that it is the duty of the court to go behind the smoke screen of expansion to avoid taxing and welfare legislation and discover the state of affairs.

Under Statutory Provisions :

1.       Reduction in Membership S. 45

In case membership in a public Company falls below 7 and in a private Company below 2; and the Co. carries on business as such for more than 6 months, every member shall be severally liable for the debts of the Co.

2.       Fraudulent Trading S. 542

In the course of winding up of a Co., business carries on with the intent to defraud creditors or for any fraudulent purpose; the persons who r parties to fraud r personally liable without limitation of liability of Co.

3.       Mis-description of Company S. 147

In any contract or act where name of Company is not fully or properly indicated, those responsible for it shall be personally liable. Similarly, address of its registered office be mentioned in legible characters in all busi8nesz letters, bill heads, notices etc.

4.       Holding and Subsidiary Company

Section 212 to 214 of the Companies Act provide form obtaining information of accounts and financial position of a group of Companies as a whole.

Lifting of Corporate Veil : Case Laws

K. HINGORANI V/s STATE OF BIHAR

Lifting the veil of govt. Companies is permissible when corporate personality is found to be opposed to justice, convenience of interest of revenue or convenience of interest of workmen or public policy.

Separate Legal Entity : Case Laws

SOLOMON V/s SOLOMON AND Company.

Solomon sold his business to Solomon and Company. Which consisted of Solomon himself, his wife, daughter and 4 sons. One share of  (insert symbol)  1 each was subscribed by his wife, daughter and four sons and rest held by Solomon himself. He was the MD of the Company.

After one year, Co. became insolvent and winding up commenced. On winding up, assets were worthy 6000 and liability 17000 of which 10,000 were due to himself (Solomon) having a floating charge and 7000 to unsecured creditors.

The house of lords held that a Co. is distinct from its members and its assets must be applied in payment of debentures first in priority to unsecured creditors. The Company being duly incorporated became a separate legal entity independent from Solomon and was his agent. Therefore, he was not liable to indemnify the Company for its debts.

The Company does not lose its identity if bulk of its capital is held by one person. The Company, in law, is altogether different from its subscriber.

LEE V/s LEE’S AIR FARMING Company. LTD

Lee formed a Company (Lee’s Air Farming). Out of 3000 shares, Lee himself held 2999 shares and was the sole governing director of Company. He was also appointed by the Company as ‘Chief Pilot’. The Company was insured against liability to pay compensation under Workmen’s Compensation Act.

Lee died during the course of his employment in an air crash. His widow claimed compensation.

The court held that Lee and Co. were two distinct legal entities having contractual relationship under which Lee became an employee of the Company.  The relationship between Lee as Pilot and the Company was that of servant and master.

The compensation was held to be payable to the widow. Thus, Company and its sole governing director were held to be separate legal entities.  

Corporation and Fundamental Right: Case Laws:

STC Vs CTO (SC decision, 1963)

Issue : whether STC is a citizen within the meaning of Article 11 can ask for enforcement of FR

The Supreme Court enshrined that certain FRs ( Article 14, 20, 21, 27, 28) subject to reasonable restrictions and limitations are available to ‘any person’ irrespective of whether he is a citizen of India or an alien, whether a natural or artificial person. On the other hand, certain FRs have been guaranteed only to citizens and certain disabilities imposed upon the state with respect to citizens only.

From the above it may be concluded that all citizens are persona but all persons are not citizens.

The term ‘citizens’ had not been defined in the constitution. Constitution deals with citizenship which shall be by birth, by descent by migration and by registration.  The definition of ‘person’ in section 2(1)(f) of Citizenship Act provides that person does not include any Company or body of individuals, whether incorporated or not. Thus, relevant provision of the constitution and Citizenship Act does not contemplate a corporation as a citizen.  

Held : corporation may be nationals of the country of their incorporation for the purposes of international law but this fact will not make them citizens of the country.

               

v  STATE OF GUJARAT V/s SHRI AMBICA MILLS (SC decision, 1974)

                Held : a citizen shareholder may ____

TELCO V/s STATE OF BIHAR (SC decision, 1964)

(Company cannot lay claim to FR under Article 19 (1)(g) on the basis of aggregation of citizens.)

The STO levied the sales tax on the ground that transactions were inter-State sales & not protected by Article 286 (1)(a). The petitioner including 2 shareholders challenged the levy of tax on the ground that sales were affected in the course of inter-State trade, thus, protected by Article 286 (1)(a). It was the alleged infringement of their FR.

The court observed that if legislature intends that the benefit of Article 19 be made available to corporation, it may enlarge the definition of citizens under the citizenship Act. On the other hand, the parliament has not chosen to make any such provision indicates that it was not the intention of the parliament to tr5eat corporation as citizens.

The court further observed that in view of decision in STC, the petitioner cannot be heard to say that shareholder should be allowed to file petition non the ground that in substance, the corporation and companies are nothing more than association of shareholders and members thereof.

Held : Argument for lifting the corporate veil cannot be sustained. 

CHARITABLE CONTRIBUTIONS

Political Contributions :

DIVIDEND

BORROWING POWER OF COMPANY  DEBENTURE AND CHARGE

Allotment of shares

LAW OF PROSPECTUS IN COMPANY LAW 

Relationship between MOA and AOA.

DOCTRINE OF ULTRA VIRES

CONVERSION OF PRIVATE Company TO PUBLIC Company

KINDS OR TYPES OF COMPANIES

COMPANY LAW:-Characteristics of Company