1. INTRODUCTION
TO COMPANY
Course: LLB II
Subject : Company Act
Unit: I

2. What is a company?
What is a company?
The term Company is used to describe an association of a number of persons,
formed for some common purpose and registered according to the law relating to
companies.
Lord Justice Lindley defines:
"By a company is meant an association of many persons who contribute money or
money's worth to a common stock and employ it for a common purpose. The
common stock so contributed is denoted in money and is the capital of the
company. The persons who contribute it or to whom it belongs are members. The
proportion of capital to which each member is entitled is his share.“

3. C. Essential features:
The principal characteristics of an incorporated company can be summarised as follows:
1. Registration;
2. Voluntary Association;
3. legal personality;
4. Contractual capacity;
5. Management;
6. Capital;
7. Permanent existence;
8. Registered Office;
9. Common Seal;
10. Limited Liability;
11. Transferability;
12. Statutory Obligations;
13. Not a citizen;
14. Residence;
15. Fundamental rights;
16. Social Objective;
17. Centrally Administrated;
18. "Lifting the veil" of the company

4. Features of a companyFeatures of a company
1.1. A company is considered as aA company is considered as a separate legal entityseparate legal entity from itsfrom its
members, which can conduct business with all powers to contract.members, which can conduct business with all powers to contract.
2. Independent corporate entity2. Independent corporate entity (Saloman V. Saloman) It is independent(Saloman V. Saloman) It is independent
of its members and shareholdersof its members and shareholders

5. Other featuresOther features
3.3. Limited Liability ( either by share or guarantee)Limited Liability ( either by share or guarantee)
4. It can own property, separate from its members. The property is4. It can own property, separate from its members. The property is
vested with the company, as it is a body corporate.vested with the company, as it is a body corporate.
5.The income of the members are different from the income of the5.The income of the members are different from the income of the
company ( Income received by the members as dividends cannot becompany ( Income received by the members as dividends cannot be
same as that of the company)same as that of the company)

6. Features continued..Features continued..
6.6. Perpetual successionPerpetual succession: Death of the members is not the death of the: Death of the members is not the death of the
company until it is wound upcompany until it is wound up
7. As it is a legal entity or a7. As it is a legal entity or a juristic person or artificial person it canjuristic person or artificial person it can suesue
and be suedand be sued
8.The company enjoys8.The company enjoys rights and liabilitiesrights and liabilities which are not as that of thewhich are not as that of the
members of the companymembers of the company

7. Theories of corporate
personality and company

8. Theories of corporate
personality and company
• Some theories of the corporation cont …
• Contractual theory: the company is a nexus of contracts between various constituencies—
shareholders, managers, creditors and employees—who have an interest in the firm. The law is
designed to allow the different parties to make and enforce various legal relations (e.g. limited
liability).
• Aggregate theory: related to contractual theory and based on the idea that individuals form
associations or aggregations to carry out some common purpose; in the case of a company it is
usually a commercial purpose.
• Political or stakeholder theory: a company is a distinct social entity, rather than the product of
private contract, and has various stakeholders, including the community itself. The company is
responsible to the whole community, not just to shareholders.

9. Some theories of the corporation cont …
• Communitarian theory: a company is a social institution and operates
within a community. It has a responsibility to all members of the
community, and is not just as a profit- making institution for the
shareholders and officers of the company.
• Concession theory: sometimes referred to as privilege theory, concession
theory states that a company is created by the state and the status of
separate legal entity is conceded, or alternatively granted, as a privilege to
a body. The company, in turn, has responsibilities and duties to society
when making decisions that affect the community

10. The company as a legal person
• Company as separate legal entity
• A company is a separate legal entity that comes into existence at the
beginning of the day of its registration: s 119.
• A company takes the legal capacity and powers of an individual in and
outside the jurisdiction. It can issue shares and other securities, including
rights to put charges on company property: s 124.
• A company, once created, is a separate legal entity from its owners
(members), its operators (directors, officers and employees) and any other
agent who is contracted by the company.

11. Lifting of Corporate VeilLifting of Corporate Veil
9. As the company is9. As the company is a separate legal entitya separate legal entity , is has been provided with, is has been provided with
a veil, compared to that of individuals who are managing thea veil, compared to that of individuals who are managing the
company.company.
10.But if the court feels that such veil has to been used for any10.But if the court feels that such veil has to been used for any
wrongful purposewrongful purpose, the, the courtcourt lifts the corporate veil and makes thelifts the corporate veil and makes the
individual liable for such acts which they should not have done orindividual liable for such acts which they should not have done or
doing in the name of the companydoing in the name of the company

12. Circumstances to lift theCircumstances to lift the
corporate veil…corporate veil…
The corporate veil can be lifted eitherThe corporate veil can be lifted either
under theunder the
• Statutory provisionsStatutory provisions oror
• Judicial interpretationsJudicial interpretations
The statutory provisions areThe statutory provisions are
Provided under the CompaniesProvided under the Companies
Act, 1956Act, 1956
The other circumstances are decidedThe other circumstances are decided
through Judicial interpretations, whichthrough Judicial interpretations, which
are based on facts of each case as perare based on facts of each case as per
the decisions of the court.the decisions of the court.

13. Statutory circumstances for liftingStatutory circumstances for lifting
the corporate veilthe corporate veil
• Reduction in membership-Reduction in membership- Less than seven in public company andLess than seven in public company and
less than two if it is a private companyless than two if it is a private company
• Failure to refund application money-Failure to refund application money- After the issue of shares to theAfter the issue of shares to the
pubic, the company has to pay back the initial payment to thepubic, the company has to pay back the initial payment to the
unsuccessful applicants (SEBI Guidelines- 130 Days), if they fail to dounsuccessful applicants (SEBI Guidelines- 130 Days), if they fail to do
so, the corporate veil can be lifted.so, the corporate veil can be lifted.
• Mis-description of companies name-Mis-description of companies name- While signing a contract if theWhile signing a contract if the
company’s name is not properly describedcompany’s name is not properly described, then the corporate, then the corporate
veil can be lifted.veil can be lifted.

14. continuedcontinued
• Misrepresentation in the prospectus-Misrepresentation in the prospectus- (Derry Vs Peek) In(Derry Vs Peek) In
case of misrepresentation, the promoters, directors andcase of misrepresentation, the promoters, directors and
every other person responsible in this matter can be heldevery other person responsible in this matter can be held
liable.liable.
• Fraudulent Conduct-Fraudulent Conduct- In case the company is carried on withIn case the company is carried on with
an intent to defraud the creditors, then the court may lift thean intent to defraud the creditors, then the court may lift the
corporate veil.corporate veil.
• Holding and subsidiary companies-Holding and subsidiary companies- A subsidiary has aA subsidiary has a
distinct legal entity from the holding company other than in adistinct legal entity from the holding company other than in a
few circumstances, so if otherwise shown, the court mayfew circumstances, so if otherwise shown, the court may
under the Act , lift the corporate veil of the subsidiaryunder the Act , lift the corporate veil of the subsidiary
company.company.

15. Circumstances to lift the corporateCircumstances to lift the corporate
veil through judicial interpretationsveil through judicial interpretations
• When the court feels that there are no statutory provisions whichWhen the court feels that there are no statutory provisions which
can pierce the corporate veil, andcan pierce the corporate veil, and the identity of the company is notthe identity of the company is not
the one which has to exist, and the court has to interfere in order tothe one which has to exist, and the court has to interfere in order to
avoid the activities that are done in the name of the company byavoid the activities that are done in the name of the company by
persons managing thempersons managing them, it has been empowered to do so……, it has been empowered to do so……
The circumstances are…..The circumstances are…..

16. Judicial interpretations by the court areJudicial interpretations by the court are
as follows:as follows:
• Protection of Revenue-Protection of Revenue- When ever a company uses its name for theWhen ever a company uses its name for the
purpose of tax evasion or to circumvent tax obligationspurpose of tax evasion or to circumvent tax obligations
• Prevention of fraud or Improper conduct-Prevention of fraud or Improper conduct- The incorporation has been usedThe incorporation has been used
for fraudulent purpose, like defrauding the creditors, defeating the purposefor fraudulent purpose, like defrauding the creditors, defeating the purpose
of law etc..of law etc..
• Determination of the character of the company-Determination of the character of the company- Enemy company or all theEnemy company or all the
members being the citizens of the enemy country. (Daimler Co. Ltd V.members being the citizens of the enemy country. (Daimler Co. Ltd V.
Continental Tyre & Rubber Co. Ltd)Continental Tyre & Rubber Co. Ltd)

17. Other circumstancesOther circumstances
• Where a company is used to avoid welfare legislation-Where a company is used to avoid welfare legislation- If a company is formed inIf a company is formed in
order to avoid the benefits to the workers like bonus, or other statutory benefits..order to avoid the benefits to the workers like bonus, or other statutory benefits..
• For determining the technical competence of the company-For determining the technical competence of the company- To look into theTo look into the
competency of the company or the shareholders or promoterscompetency of the company or the shareholders or promoters
(New Horizon’s Ltd and Another V. Union of India(New Horizon’s Ltd and Another V. Union of India
(1994)(1994)

18. Kinds of Companies

19. Types of CompaniesTypes of Companies
• Limited Company ( Limited by share or by guarantee)Limited Company ( Limited by share or by guarantee)
• Unlimited companyUnlimited company
• Government CompanyGovernment Company
• Foreign CompanyForeign Company
• Private CompanyPrivate Company
• Public CompanyPublic Company
• Holding CompanyHolding Company
• Subsidiary CompanySubsidiary Company

20. 1. Limited Company1. Limited Company
• Limited by Shares-Limited by Shares- In such companies, the liability is only theIn such companies, the liability is only the
amount which remains unpaid on the shares.amount which remains unpaid on the shares.
• Limited by Guarantee not having share capital-Limited by Guarantee not having share capital-In this type ofIn this type of
companies the memorandum of Association limits thecompanies the memorandum of Association limits the
members’ liability. It will be based on the undertaking that hasmembers’ liability. It will be based on the undertaking that has
been given in MOA for their contribution in case of a windingbeen given in MOA for their contribution in case of a winding
up.up.
• Limited by guarantee having share capital-Limited by guarantee having share capital- In such cases , theIn such cases , the
liability would be based on the MOA towards the guaranteedliability would be based on the MOA towards the guaranteed
amount and the remaining would be from the unpaid sums ofamount and the remaining would be from the unpaid sums of
the shares held by the person concerned.the shares held by the person concerned.

21. 2. Unlimited Company2. Unlimited Company
• There isThere is no limit on the liability of the members.no limit on the liability of the members. The liability in suchThe liability in such
cases would extend to the whole amount of the company’s debts andcases would extend to the whole amount of the company’s debts and
liabilities.liabilities.
• Here theHere the members cannot be directly sued by the creditorsmembers cannot be directly sued by the creditors..
• When the company is wound up, the official liquidator will call uponWhen the company is wound up, the official liquidator will call upon
the members to discharge the liability.the members to discharge the liability.
• The details of the number of members with which the company isThe details of the number of members with which the company is
registered and the amount of share capital has to be stated in theregistered and the amount of share capital has to be stated in the
Articles of Association (AOA).Articles of Association (AOA).

22. 3. Government Company3. Government Company
• WhenWhen 51%51% of the paid up share capital is held by theof the paid up share capital is held by the
government.government.
• The share can be held by theThe share can be held by the central government or statecentral government or state
governmentgovernment. Partly by central and partly by two or more. Partly by central and partly by two or more
governments.governments.
• As the legal status of the company does not change byAs the legal status of the company does not change by
being a government company, there are no specialbeing a government company, there are no special
privileges given to them.privileges given to them.

23. 4. Foreign Company4. Foreign Company
• A company incorporated outside India, butA company incorporated outside India, but having a place ofhaving a place of
business in Indiabusiness in India..
• If it does not have a place of business in India but only has agents inIf it does not have a place of business in India but only has agents in
India it cannot be considered to be foreign company.India it cannot be considered to be foreign company.

24. 5.Private Company5.Private Company
• A company which has aA company which has a minimum of two personsminimum of two persons. They have to subscribe to. They have to subscribe to
the MOA and AOAthe MOA and AOA
• It should be have aIt should be have a minimum paid up capital of 1 lakh or moreminimum paid up capital of 1 lakh or more as prescribedas prescribed
by the article.by the article.
• The maximum number of members to be fiftyThe maximum number of members to be fifty ( it does not include members( it does not include members
who are employed in the company, persons who were formerly employed)who are employed in the company, persons who were formerly employed)
• TheThe rights to transfer the shares are restrictedrights to transfer the shares are restricted in the Private companies (1)in the Private companies (1)

25. • Prohibits any invitation to the public to subscribeProhibits any invitation to the public to subscribe and therefore it cannotand therefore it cannot
issue a prospectus inviting the public to subscribe for any shares in, orissue a prospectus inviting the public to subscribe for any shares in, or
debentures of the companydebentures of the company
• ItIt prohibits acceptance of depositsprohibits acceptance of deposits from persons other than its members,from persons other than its members,
directors or their relatives.directors or their relatives.
• IfIf two or more are holding one or more sharestwo or more are holding one or more shares in a companyin a company jointly,jointly, theythey
shall for the purpose of this definition, be treated asshall for the purpose of this definition, be treated as a single member.a single member.
• As there isAs there is no public accountabilityno public accountability like a public company, there islike a public company, there is nono
rigorous surveillance.rigorous surveillance.

26. Exemption and Privileges of a Private companyExemption and Privileges of a Private company
• It can have aIt can have a minimum of two members.minimum of two members.
• It canIt can commence business immediatelycommence business immediately after obtaining certificate ofafter obtaining certificate of
incorporation.incorporation.
• It needIt need not issue prospectusnot issue prospectus or statement in lieu of prospectus.or statement in lieu of prospectus.
• It can have aIt can have a minimum of 2 directors.minimum of 2 directors.
• ItIt need not hold statutory meetingneed not hold statutory meeting or file statutory report with theor file statutory report with the
ROC.ROC.

27. 6. Public Company6. Public Company
• A Public company means a company-A Public company means a company-
> Which is> Which is not a private companynot a private company
> Which has a> Which has a minimum paid-up capital of Rs 5 lakhs or suchminimum paid-up capital of Rs 5 lakhs or such
higher paid-uphigher paid-up capital, as may be prescribedcapital, as may be prescribed
> Which is> Which is a private company and is a not a subsidiary ofa private company and is a not a subsidiary of aa
company, which iscompany, which is private company.private company.
>It includes- any company which is a public company with a paid>It includes- any company which is a public company with a paid
up capital of less than 5 lakhs, then it has toup capital of less than 5 lakhs, then it has to enhance its paid upenhance its paid up
capital as per the statutory requirement (2)capital as per the statutory requirement (2)
Minimum no. of Directors in case of a public company is 3.

28. Conversion of CompanyConversion of Company
• The Act provides forThe Act provides for conversion of public company into a privateconversion of public company into a private
company and vice versacompany and vice versa
• A private company is converted into a public company eitherA private company is converted into a public company either byby
default or by choicedefault or by choice in compliance with the statutory requirements.in compliance with the statutory requirements.
• Once the action for conversion takes place then,Once the action for conversion takes place then, a petition can bea petition can be
filed with the central government with the necessary documents forfiled with the central government with the necessary documents for
its decision on the matter of conversionits decision on the matter of conversion

29. 7. holding company
• A holding company is a company or firm that owns other
companies' outstanding stock. The term usually refers to a company
that does not produce goods or services itself; rather, its purpose is
to own shares of other companies to form a corporate group. Holding
companies allow the reduction of risk for the owners and can allow
the ownership and control of a number of different companies.
• In the United States, 80% or more of stock, in voting and value, must
be owned before tax consolidation benefits such as tax-free
dividends can be claimed. That is, if Company A owns 80% or more
of the stock of Company B, Company A will not pay taxes on
dividends paid by Company B to its stockholders, as the payment of
dividends from B to A is essentially Company A switching cash from
one of its pockets to another. Any other shareholders of Company B
will pay the usual taxes on dividends, as they are legitimate and
ordinary dividends to these stockholders. (3)

30. 8. Subsidiary companies
• Definition
• A subsidiary is a company that has been set up or
acquired by another company that is usually either larger
or better-known to the public as a result of its longevity or
reputation. The acquiring company is called the parent
corporation. If a parent corporation exists strictly to hold
stock in other entities, it is referred to as a holding
company. (4)

31. Subsidiary companies
• Ownership
• In a subsidiary situation, the parent corporation owns more than 50
percent of the voting stock of each of the companies it acquires. If it
holds all of the voting stock, the smaller entity is said to be a wholly
owned subsidiary. Parents and their subsidiaries are separate legal
entities insofar as liability issues but sometimes file their financial
statements as a single unit. Ownership of 80 percent or more of a
subsidiary's stock is required for the parent corporation to submit
consolidated tax returns.

32. Registration and incorporation
of the company

33. Steps for formation of a
company• Types of Company
• Availability of Name
• The Memorandum and Articles of Association duly signed, and
stamped.
• The agreement, if any with any individual for appointment as its
Managing or whole-time director.
• Consent of directors in Form 29.
• Notice of Registered address in Form 18 to be given within 30 days of
the date of incorporation.
• Particulars of Directors in Form 32.

34. Steps for formation of a
company
• Payment of Registration Fees.
• Power of attorney, to fulfill various legal and other formalities.
• Statutory Declaration in Form No. 1 that all requirements of the
Companies Act and the rules thereunder have been complied with.
• The declaration should be made by either an advocate of Supreme
Court / High Court, a practicing Chartered Accountant or a director, or
a manager or a secretary named in the Articles of the proposed
company. [Section 33 (2)]

35. Registration and IncorporationRegistration and Incorporation
• Association of persons or partnership or more thanAssociation of persons or partnership or more than 20 members ( 10 in20 members ( 10 in
case of banking) can register to form a company under the Companiescase of banking) can register to form a company under the Companies
Act, 1956Act, 1956
• If they do not register they can be considered to be illegal association.If they do not register they can be considered to be illegal association.
The contract entered into by this illegal association isThe contract entered into by this illegal association is void and cannotvoid and cannot
be validated.be validated. Its illegality willIts illegality will not affect its tax liability or itsnot affect its tax liability or its
chargeabilitychargeability
• The certification of incorporation is the conclusive evidence, that all theThe certification of incorporation is the conclusive evidence, that all the
requirements for the registration have been complied with it.requirements for the registration have been complied with it.

36. Incorporation of a CompanyIncorporation of a Company
• The persons whoThe persons who conceive an ideaconceive an idea of a company decide and do theof a company decide and do the
necessary work for formation of a company are called thenecessary work for formation of a company are called the promoterspromoters ofof
the Company.the Company.
• The Promoters are the persons who decide on theThe Promoters are the persons who decide on the formation of theformation of the
company.company.
• The promoters of a company stand undoubtedly in aThe promoters of a company stand undoubtedly in a fiduciary positionfiduciary position
though they are not the agent or a trustee of a company. They are thethough they are not the agent or a trustee of a company. They are the
ones “who create and mould the company”.ones “who create and mould the company”.
• They may have to enter intoThey may have to enter into pre-incorporation contractspre-incorporation contracts , which can be, which can be
validated after the incorporation of the company for obtaining certificate ofvalidated after the incorporation of the company for obtaining certificate of
incorporation.incorporation.

37. References
• 1.www.property118.org
• 1a.http://www.mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf
Pg:18
2.http://www.mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf
Pg: 18
• 3.http://www.mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf
Pg:38
• 4.http://www.mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf
Pg:38
• http://www.mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf

38. Thank You