Lecture on Companies Act, 2013
Prof. (Dr.) Shyam Agarwal
Meaning of Company
Distinct Legal Entity:
- Artificial Legal Person
- Invisible and Intangible
- Economic or Otherwise
To meet Given constraints, arising out of
- Business Expansion,
- Required Manpower size and
- Financial Support Quantum.
The Companies Act, 2013 (CA 2013)
Definition of Company (Co)
A Body Corporate, incorporated under CA 2013
(or Previous Statutes)
Consistency with Other Acts / Statutes
Type of Co Referral Statute
Banking Co Banking Regulation Act, 1949
Insurance Co Insurance Act, 1938
Insurance Regulatory and
Development Authority Act, 1999
Electric Co Electricity Act, 2003
Other Co (Any) Special Acts of Legislature for those
Co as a Body Corporate: Advantages
1. Independent Legal Entity & Corporate Existence
- Independent of its Members
Salomon vs Salomon & Co Ltd (1897 AC 22)
Ashoka Marketing Ltd vs PNB (1990 – 4 SCC 406)
- Separate Entity Principle
Vodafone Intl Hldgs BV vs UoI (2012 – 6 SCC 613)
2. Limited Liability, for Business Debts
- Co Owner of its Assets & Bound by its Liabilities.
(as Separate from Members / Shareholders, who has
Restricted Liability to Shares held & extends ‘Not’ to
their Other assets. Except for Personal Guarantee by
Shareholder – Directors, Co-signing of Co Debts.)
Co as a Body Corporate: Advantages (2)
3. Everlasting Existence / Perpetual Succession:
- Co ‘Never dies’.
- Membership may Change. (Members come and go.)
But Co will be Same Entity with same
- Privileges and Immunities with
- Estates and Possessions, i.e.,
Co can go on ‘For ever’.
4. Separate Property:
- Co may Own, Enjoy, or Dispose off Property in Its Name.
- Member / Shareholder has ‘No’ Legal or Equitable Interest.
Co as a Body Corporate: Advantages (3)
5. Flexibility of Investment / Transferable Shares
- Benefit of : Liquidity to Investor, and
Stability to Co.
6. Capacity to Sue and Being Sued, in Co name
- Co can lodge Criminal Complaints and seek Damages against
- But Co ‘Can Not’ have the Status of a Citizen under
‘Constitution of India’.
State Trading Corp of India vs CTO (AIR 1963 SC 1811)
Co as a Body Corporate: Advantages (4)
7. Professional Management /
Separation of Ownership and Management
- Shareholders ‘Need Not’ be Managers of Co.
8. Proportionate Representation
- One Share, One Vote principle. (Contrast to Cooperative Socy.)
- Bigger Shareholders can Control.
- Privilege of raising Capital by Public Subscription. (as Shares or
- Public Financial Institutions generally ‘More Willingly’ support.
Company Partnership Firm
1. Governing Statutes
- CA 2013 - Indian Partnership Act, 1932
- Separate Legal Entity - No Mandatory Registration.
- Oral or Written Agreement suffices.
- Shareholders Limited - Unlimited Liability of Partners.
4. Property Status
- Co owns and ‘Not’ - Partners’ ownership.
Company Partnership Firm (2)
5. Investment Flexibility
- Free Transfer of Shares - No Transfer ‘without Consent’ of
(In private co. separate other Partners.
provision may bind.)
6. Number of Members
- Minm: 7, Minm: 2. - Minm: 2
Max: 200 - ≤ 10 for Banking business
(Pvt. Co) - ≤ 20 for Other business
- Shareholder Majority - All Partners’ Consent is must.
8. Life of Entity
- Can Go forever. - Dissolves on Death of a Partner.
Co as a Body Corporate: Disadvantages
Source: Mostly from Trading Privileges with Limited Liability.
1. Lifting the Corporate Veil. Breaking through;
(a) Human beings are Real Beneficiaries of Co Advantages.
Beneficial de-facto Owners of the Corporate Property.
(b) For - Property and Capacity,
- Acts done and Rights acquired, and
- Liabilities assumed;
Persons involved enjoy without Strict Accountability.
(c) Corporate Personality Magic: One is
Master & Servant simultaneously.
except (i) where Misuse of Corporate Money, and
(ii) in Contempt cases.
Co as a Body Corporate: Disadvantages (2)
2. Exceptions to Privileges of Corporate Entity:
2.1 Concerning Government & State
(1.1) Determination of Character and Distinct Existence
- Thin line of Demarcation
(1.2) For Benefit of State Exchequer
- when Tax Evasion is resorted to or
Tax Obligation is Circumvented;
Court may Disregard Corporate Entity & Privileges.
(1.3) Fraud or Improper Conduct
- Corporate Entity can’t be for Illegal or Fraudlent purposes
Co as a Body Corporate: Disadvantages (3)
(1.4) Government Companies
- Separate (from Govt.) Entity vs State Entity (State Agent)
Landmark Judgment by Justice Krishna Iyer:
[1981 - 1 SCC 449 (1981)]
Any Authority Controlled by GoI is itself State.
(Art 12. Definition – …“the State” includes.. all local or
other authorities.. Under the control of the GoI.)
- Enforcement of Fundamental Rights after
Scrutiny of real Character of Entity.
- Especially, in case of no Functioning Autonomy.
Co as a Body Corporate: Disadvantages (4)
2.2 Tests for Separate Entity (or Parent Co Liability)
(1) Profits to be Treated as Profit of Parent Co;
(2) Appointment by Parent Co to top Positions;
(3) Head or Brain of Co: Whether Parent or Other;
(4) Decision on Adventure, especially regarding
- What should be Done,
- Capital Quantum on Venture;
(5) Whether Own Skill and Direction ?;
(6) Where is Constant and Effectual Control of Co.
Above applies also for ‘Taxation Clubbing’ purposes.
Co as a Body Corporate: Disadvantages (5)
2.3 Personal Liability of Directors and Members (Statutory)
(1) Non-compliance of requirements of Incorporation (S 464),
(2) Mis-description of Name (S 12),
(3) Fraudulent Conduct of Business (S 339),
(4) Holding and Subsidiary Co [S 2(46), S 2 (87)],
When, BoD is closely involved.
But MNC Subsidiary is treated separately.
Above implies that Incorporation does not Cut off Personal
Liability at All Times and in all Circumstances.
Co as a Body Corporate: Disadvantages (6)
3. Procedural Formality and Expenses thereon.
- Can be very Expensive.
- Cumbersome Procedures constrains ‘Ease of Doing Business’.
- Source of Rent Seeking and Uncalled-for Interferences.
4. Co is ‘Not a Citizen’.
- But it has:
(a) Nationality, (Country where Incorporated) with
“No change allowed like a Citizen”, and
(b) Domicile and Residence (Location of Registered
Co vs Limited Liability Partnership Firm (LLP)
1. Regulation by CA 2013 Agreement among Partners
2. Management – Ownership
3. Governed by Statute More Flexibility &
Lesser Compliance mandated
4. Compliance Mandated like
Quarterly BoD Meetings.
No Specific Statutory provision is laid
(1) Minm. Statutory Fee
(2) Minm. Paid-up Capital
Public Ltd - Rs. 5 lakhs
Pvt. Ltd - Rs. 1 lakh.
No Specified Limit.
Types of Companies: Salient Characteristics
1. Members / Shareholders
1.1 One Person Co (OPC, New Concept) [S 2(62), S 13]
- Member: Only One Person (Indian Citizen and Resident of
- Indian individual with Limited Liabilities does Business.
- MoA must indicate Alternate Member, in case of
1.2 Private Co [S 3(1)(b)]
- Restricts ‘Right’ to Share Transfers
- No. of Members: ≤ 200. (Minm: 2)
- No Public invitation to Subscribe Co Securities.
Types of Companies: Salient Characteristics (2)
1.3 Public Co (Defn: Not a Private Co) [S 2(71)]
- No Restriction on Share Transfer.
- Unlimited Number of Members.
- Public Invitation to Subscribe its Securities (like IPO etc.).
- Usually Listed on Recognized Stock Exchange.
- Co can Alter Activities, by Special Resolution.
- Conversion of Private Ltd. Co to Public Ltd. Co
and Vice Versa (Only with Approval of Tribunal; S 14(1).