INTRODUCTION

The Companies Act, 2013 was enacted to consolidate and amend the law relating to the
companies to facilitate expansion and growth of our economy (previous one was the Companies
Act, 1956). The Companies Act, 2013 contains 470 sections and 7 schedules. The Act has
been divided into 29 chapters. A substantial part of this Act is in the form of Companies Rules.

Applicability of the Companies Act, 2013:

The provisions of the Act shall apply to-

✓ Companies incorporated under this Act or under any previous company law.
✓ Insurance companies (except where the provisions of the said Act are inconsistent with the
provisions of the Insurance Act, 1938 or the IRDA Act, 1999)
✓ Banking companies (except where the provisions of the said Act are inconsistent with the
provisions of the Banking Regulation Act, 1949)
✓ Companies engaged in the generation or supply of electricity (except where the provisions
of the above Act are inconsistent with the provisions of the Electricity Act, 2003)
✓ Any other company governed by any special Act for the time being in force.
✓ Such body corporate which are incorporated by any Act for time being in force, and as the
Central Government may by notification specify in this behalf.

COMPANY: MEANING AND ITS FEATURES

Meaning: According to Professor Haney, “A company is an incorporated association, which is

an artificial person created by law, having a separate entity, with a perpetual succession and
a common seal.” This definition sums up the meaning as well as the features of a company
succinctly.

However, as per Section 2(20) of the Companies Act, 2013, “Company means a company
incorporated under this Act or under any previous company law”.

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 Features of a Company (PLEASE)

Separate Legal Entity •Legally separate from the members

Perpetual succession • Change in members does not affect existence of Company

Limited Liability • Liability of Company is different from liability of members

• Company can act through human agency only

Artificial Juridicial Person
• Company can contract, sue and be sued in its own name

Common Seal • Official signature of a company

1. Separate Legal There are distinctive features between different forms of

Entity organisations and the most striking feature in the company form
of organisation vis- à-vis the other forms of business organisations
is that it has the character of being a separate legal entity. It comes
to have almost the same rights and powers as a human being. A
company can own property, have bank account, raise loans, incur
liabilities and enter into contracts.
(a) It is different from the subscribers to the memorandum of
association. Its existence is distinct and separate from that of its
members.
(b) Even members can contract with company, acquire right against
it or incur liability to it. For the debts of the company, only its
creditors can sue it and not its members.
(c) A company is capable of owning, enjoying and disposing of
property in its own name. Although the capital and assets are
contributed by the shareholders, the company becomes the
owner of its capital and assets.
A member does not even have an insurable interest in the property
of the company. The leading case on this point is of Macaura Vs.
Northern Assurance Co. Limited (1925):
Macaura (M) was the holder of nearly all (except one) shares of a
timber company. He was also a major creditor of the company. M
insured the company’s timber in his own name. The timber was lost
in a fire. M claimed insurance compensation. It was held that, the
insurance company was not liable to him as no shareholder has any
right to any item of property owned by the company. Hence in this
case, since the timber was to be insured in the company’s name, M
could not claim the compensation from insurance company.

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 2. Perpetual Members may die or change, but the company goes on till it is
Succession wound up as per this Act. Since a company is an artificial person
created by law, law alone can bring an end to its life. Its existence
is not affected by the death or insolvency of its members.
Note: Many companies in India are in existence for over 100 years.
There was a company which has 7 members and all of them died
in an aircraft. Despite this the company still exists.
3. Limited Liability The liability of a member depends upon the kind of company.
Company is a separate legal entity distinct from its members.
(i) Thus, in the case of a limited liability company, the liability of
the members of the company is limited to the extent of the
amount unpaid on the shares held by them.
(ii) In the case of a company limited by guarantee, the members are
liable only to the extent of the amount guaranteed by them and
that too only when the company goes into liquidation.
(iii)However, if it is an unlimited company, the liability of its
members is unlimited as well.
4. Artificial Legal 1. A company is an artificial person as it is created by a process
Person other than natural birth. It is legal or judicial as it is created by
law having all the rights of an individual.
2. Further, the company being a separate legal entity can own
property, have banking account, raise loans, incur liabilities and
enter into contracts. Even members can contract with company,
acquire right against it or incur liability to it. It can sue and be
sued in its own name. It can do everything which any natural
person can do except be sent to jail, take an oath, marry or
practice a profession.
3. As the company is an artificial person, it can act only through
some human agency, viz., directors. The directors act as its
agent, but they are not the “agents” of its members.
4. Thus, a company is called an artificial legal person.
5. Common Seal A company being an artificial person working through the agency
of human beings. Common seal is the official signature of a company,
which is affixed by the officers and employees of the company on
its every document. The common seal is a seal used by a corporation
as the symbol of its incorporation.
The Companies (Amendment) Act, 2015 has made the common
seal optional so as to provide an alternative mode of authorization
for companies who opt not to have a common seal.

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 This amendment provides that the documents which need to be
authenticated by a common seal will be required to be so done, only
if the company opts to have a common seal.
In case a company does not have a common seal, the authorization
shall be made by
- 2 directors or
- by a director and the Company Secretary, wherever the
company has appointed a Company Secretary.

CORPORATE VEIL THEORY

(i) Corporate Veil

Corporate Veil refers to a legal concept whereby the company is

identified separately from the members of the company.

If the company incurs any debts or contravenes any laws, the

corporate veil concept implies that members should not be liable
for those errors. Thus, the shareholders are protected from the acts of the company.

The Salomon Vs. Salomon and Co Ltd. laid down the foundation of the concept of corporate
veil or independent corporate personality.

In this case, the House of Lords laid down that a company is a person distinct and separate
from its members. In this case one Salomon incorporated a company named “Salomon & Co.
Ltd.”, with seven subscribers consisting of himself, his wife, four sons and one daughter. This
company took over the personal business assets of Salomon for £ 38,782 and in turn, Salomon
took 20,000 shares of £ 1 each, debentures worth £ 10,000 of the company with charge on
the company’s assets and the balance in cash. His wife, daughter and four sons took up one £
1 share each. Subsequently, the company went into liquidation due to general trade depression.
The unsecured creditors to the tune of £ 7,000 contended that Salomon could not be treated
as a secured creditor of the company, in respect of the debentures held by him, as he was the
managing director of one-man company, which was not different from Salomon and the cloak
of the company was a mere sham and fraud. It was held by Lord Mac Naughten:

“The Company is at law a different person altogether from the subscribers to the
memorandum, and even though after incorporation the business is precisely the same as it was
before and the same persons are managers, the company is not the agent of the subscribers.
And the subscribers, as members, are not liable except to the extent provided by the Act.”

Thus, this case clearly established that company has its own existence and as a result, a
shareholder cannot be held liable for the acts of the company even though he holds virtually
the entire share capital.

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 Now, the question may arise whether this Veil of Corporate Personality can even be lifted or
pierced.

Before going into this question, one should first try to understand the meaning of the phrase
“lifting the veil”. It means looking behind the company as a legal person. Only in appropriate
circumstances, the Courts lift the corporate veil and that too, when questions of control are
involved rather than merely a question of ownership.

(ii) Lifting of Corporate Veil

The following are the cases where company law disregards the principle of corporate
personality or the principle that the company is a separate legal entity:

Corporate Veil will be lifted

Where Where companies Where the device

corporate form other of incorporation
Trading with entity is used companies as To avoid a is adopted for
enemy to evade or their subsidiaries legal obligation some illegal or
circumvent to act as their improper
tax agent purpose

(1) To determine the character of the company i.e. to find out whether co-enemy or friend: In
the law relating to trading with the enemy where the test of control is adopted. It is true
that a company does not have mind or conscience; therefore, it cannot be a friend or foe
(enemy). It may, however, be characterised as an enemy company, if its affairs are under
the control of people of an enemy country. For this purpose, the Court may examine the
character of the persons who are really at the helm of affairs of the company.

(2) To protect revenue/tax: In certain matters concerning the law of taxes, duties and stamps
particularly where question of the controlling interest is in issue. [S. Berendsen Ltd. vs.
Commissioner of Inland Revenue]
(i) Where corporate entity is used to evade tax, the Court can disregard the corporate
entity [Juggilal vs. Commissioner of Income Tax AIR (SC)].
(ii) In the case of Dinshaw Maneckjee Petit, it was held that the company was not a genuine
company at all but merely the assessee himself disguised (masked) under the legal entity
of a limited company. The assessee earned huge income by way of dividends and interest.
So, he opened some companies and purchased their shares in exchange of his income by
way of dividend and interest. This income was transferred back to assessee by way of

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 loan. The Court decided that the private companies were a sham and the corporate veil
was lifted to decide the real owner of the income.

(3) To avoid a legal obligation: Where it was found that the sole purpose for the formation of
the company was to use it as a device to reduce the amount to be paid by way of bonus to
workmen, the Supreme Court upheld the piercing of the veil to look at the real transaction
(The Workmen Employed in Associated Rubber Industries Limited, Bhavnagar vs. The
Associated Rubber Industries Ltd., Bhavnagar and another).
Workmen of Associated Rubber Industry Ltd., v. Associated Rubber Industry Ltd.: The facts
of the case are that “A Limited” purchased shares of “B Limited” by investing a sum of Rs.
4,50,000. The dividend in respect of these shares was shown in the profit and loss account
of the company, year after year. It was taken into account for the purpose of calculating
the bonus payable to workmen of the company. Sometime in 1968, the company
transferred the shares of B Limited, to C Limited a subsidiary, wholly owned by it. Thus,
the dividend income did not find place in the Profit & Loss Account of A Ltd., with the
result that the surplus available for the purpose for payment of bonus to the workmen got
reduced.
Here a company created a subsidiary and transferred to it, its investment holdings in a bid
to reduce its liability to pay bonus to its workers. Thus, the Supreme Court brushed aside
the separate existence of the subsidiary company. The new company so formed had no
assets of its own except those transferred to it by the principal company, with no business
or income of its own except receiving dividends from shares transferred to it by the principal
company and serving no purpose except to reduce the gross profit of the principal company
so as to reduce the amount paid as bonus to workmen.

(4) Formation of subsidiaries to act as agents: A company may sometimes be regarded as an

agent or trustee of its members, or of another company, and may therefore be deemed to
have lost its individuality in favour of its principal. Here the principal will be held liable for
the acts of that company.
In the case of Merchandise Transport Limited vs. British Transport Commission (1982), a
transport company wanted to obtain licences for its vehicles but could not do so if applied
in its own name. It, therefore, formed a subsidiary company, and the application for licence
was made in the name of the subsidiary. The vehicles were to be transferred to the
subsidiary company. Held, the parent and the subsidiary were one commercial unit and the
application for licences was rejected.

(5) Company formed for fraud/improper conduct or to defeat law: Where the company is
incorporated for some illegal or improper purpose, e.g., to defeat or circumvent law, to
defraud creditors or to avoid legal obligations. [Gilford Motor Co. vs. Horne]

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 CLASSES OF COMPANIES UNDER THE ACT

The Companies Act, 2013 has broadly classified the companies into various classes on the
following basis:

access to
liability members control Other
capital

1. On the basis of liability:

Company limited by Company limited by

Unlimited company
shares guarantee

(a) Company limited by shares: Section 2(22) of the Companies Act, 2013, defines that when
the liability of the members of a company is limited by its memorandum of association to
the amount (if any) unpaid on the shares held by them, it is known as a company limited
by shares. His separate property cannot be encompassed to meet the company’s debt.

(b) Company limited by guarantee: Section 2(21) of the Companies Act, 2013 defines it as
the company having the liability of its members limited 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.
Thus, the liability of the member of a guarantee company is limited upto a stipulated sum
mentioned in the memorandum. Members cannot be called upon to contribute beyond that
stipulated sum.
The common features between a ‘guarantee company’ and ‘the company having share
capital’ are legal personality and limited liability.
However, the point of distinction is that in the case of guarantee company, the members
may be called upon to discharge their liability only after commencement of the winding
up; but in the latter case, it can be during the company’s life-time or during its winding
up.
It is clear from the definition of the guarantee company that it does not raise its initial
working funds from its members. Therefore, such a company may be useful only where no
working funds are needed or where these funds can be held from other sources like
endowment, fees, charges, donations, etc.

(c) Unlimited company: Section 2(92) of the Companies Act, 2013 defines unlimited company
as a company not having any limit on the liability of its members. In such a company, the
liability of a member ceases when he ceases to be a member.

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 The liability of each member extends to the whole amount of the company’s debts and
liabilities but he will be entitled to claim contribution from other members. In case the
company has share capital, the Articles of Association must state the amount of share
capital and the amount of each share. So long as the company is a going concern the liability
on the shares is the only liability which can be enforced by the company. When the company
goes into liquidation, the liability of the members can be unlimited for their contribution
towards the liabilities and debts of the company.

Unlimited Co.

The liability Liability is Liability of each

No limit on the
ceases on when limited till the member extends to
liability of
he ceases to be time Company is amount of Company's
members
member not wound up. debt and liabilities

Member can be called to However, he can claim

contribute only in the event of contribution from other
winding up of Company members.

2. On the basis of members

One Person Company Private Company Public Company

(a) One person company: The Companies Act, 2013 introduced a new class of companies which
can be incorporated by a single person, to encourage entrepreneurship and corporatization
of business. Section 2(62) of the Companies Act, 2013 defines one person company (OPC)
as a company which has only one person as a member.
OPC is a separate legal entity with a limited liability of the member whereas in the case of
sole proprietary, the liability of owner is not restricted and it extends to the owner’s entire
assets constituting of official and personal.

OPC (One Person Company) - significant points

➢ Only one person as member.

➢ Minimum paid up capital – no limit prescribed.

➢ The member can be the sole member and director.

➢ The memorandum of OPC shall indicate the name

of the other person, who shall, in the event of the subscriber’s death or his incapacity to
contract, become the member of the company.

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 ➢ The other person whose name is given in the memorandum shall give his prior written
consent in prescribed form and the same shall be filed with Registrar of companies at
the time of incorporation.

➢ Such other person may be given the right to withdraw his consent.

➢ The member of OPC may at any time change the name of such other person by giving
notice to the company and the company shall intimate the same to the Registrar.

➢ Any such change in the name of the person shall not be deemed to be an alteration of
the memorandum.

➢ Only a natural person who is an Indian citizen whether resident in India or otherwise
and has stayed in India for a period of not less than 120 days during the immediately
preceding financial year

• shall be eligible to incorporate a OPC;

• shall be a nominee for the sole member of a OPC.

➢ No person shall be eligible to incorporate more than one OPC or become nominee in
more than one such company.

➢ No minor shall become member or nominee of the OPC or can hold share with beneficial
interest.

➢ Such Company cannot be incorporated or converted into a company under section 8 of

the Act. Though it may be converted to private or public companies in certain cases.

➢ Such Company cannot carry out Non-Banking Financial Investment activities including
investment in securities of any body corporate.

OPC

Encourage Procedural
One Private enterpreneurship requirements Separate
Limited
member Company and are simplified Legal
Liability
Company in nature corporatization through Entity
of business exemptions

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 (b) Private Company [Section 2(68)]: “Private company” means a company having a minimum
paid-up share capital as may be prescribed, and which by its articles—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to 200:
Provided that where two or more persons hold 1 or more shares in a company jointly,
they shall be treated as a single member:
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were
members of the company while in that employment and have continued to be
members after the employment ceased,

shall not be included in the number of members; and

(iii)prohibits any invitation to the public to subscribe for any securities of the company;

Private company - significant points

No minimum paid-up capital requirement.

Minimum number of members – 2 (except if private company is an OPC, where it will

be 1).

Maximum number of members – 200, excluding present employee-cum-members and

erstwhile employee-cum-members.

Right to transfer shares restricted.

Prohibition on invitation to subscribe to securities of the company.

Small company is a private company.

OPC can be formed only as a private company.

Small Company: Small company given under the Section 2(85) of the Companies Act,
2013 which means a company, other than a public company—

(i) paid-up share capital of which does not exceed Rs. 4 crores or such higher amount as
may be prescribed which shall not be more than Rs. 10 crore; and

(ii) turnover of which as per profit and loss account for the immediately preceding
financial year does not exceed Rs. 40 crore or such higher amount as may be prescribed
which shall not be more than Rs. 100 crore:

Exceptions: This clause shall not apply to:

(A) a holding company or a subsidiary company;

(B) a company registered under section 8; or

(C) a company or body corporate governed by any special Act.

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 (c) Public company [Section 2(71)]: “Public company” means a company which—
(i) is not a private company; and
(ii) has a minimum paid-up share capital, as may be prescribed:

Provided that a company which is a subsidiary of a public company shall be deemed to be

public company for the purposes of this Act even where such subsidiary company continues
to be a private company in its articles;

Public company - significant points

 Is not a private company (Articles do not have the
restricting clauses).
 Shares freely transferable.
 No minimum paid up capital requirement.
 Minimum number of members – 7.
 Maximum numbers of members – No limit.
 Subsidiary of a public company is deemed to be a public company.

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