Concept, Nature and Meaning of Company :

• BACKGROUND AND AIM OF THE ACT

It came into existence at once from the date of notification in the Official Gazette i.e., from
30th August, 2013, It extends to the whole of India.

Structure of the Act: The Companies Act, 2013 has 470 Sections (covered in 29 Chapters)
and 7 Schedules as against 658 Sections (covered in 13 Parts) and 15 Schedules of the
Companies Act, 1956.

promote the development of the economy.

encourage transparency, accountability and high standards of corporate governance;

recognize various new concepts and procedures facilitating convenience of doing business
enforce stricter action against fraud The word 'company' is derived from the Latin words
(com= with or together; and panis = bread or meal); and originally referred to an association
of persons who took their meals together.

The term 'company' has been defined under Section 2(20) of the Companies Act, 2013. As
per this, 'company' means a company incorporated under Companies Act, 2013 or under any
of the previous laws relating to companies. 'Company' shall be used in the sense as defined
above for the entire Companies Act, 2013, unless the context otherwise requires.

1. Separate legal entity

2. Limited liability

3. Perpetual Succession

4. Separate Property

5. Transferability of Shares

6. Common Seal

7. Capacity to sue and be sued

8. Separate Management:

9. Voluntary Association for Profit

The Companies Act, 2013 replaced the Companies Act, 1956. The legislators introduced
ideas of the likes of:

• Corporate Social Responsibility (CSR)

• Class action suits

• Fixed term for the Independent Directors

• The provision of raising money from the public was made little stringent

• Prohibition on insider trading by company directors or key managerial personnel by

declaring such activities as a criminal offence

• It permits shareholder agreements providing for the ‘Right of First Offer’ or ‘Right of first
Refusal’ even in the case of Public Companies

A company is not merely a legal institution. It is rather a legal device for the attainment of
the social and economic end. It is, therefore, a combined political, social, economic and legal
institution. Thus, the term company has been described in many ways. “It is a means of
cooperation and organization in the conduct of an enterprise”.

The Companies Act, 2013 has undergone several amendments to enhance corporate
governance, ease of doing business, and compliance requirements. Below is an overview of
significant amendments:

1. Companies (Amendment) Act, 2015

• Key Changes:

o Removed the requirement for minimum paid-up capital for private and
public companies, facilitating easier incorporation.

o Allowed for the common seal to be optional, enabling authorization through

signatures of directors.

2. Companies (Amendment) Act, 2017

• Key Changes:

o Introduced provisions for ease of doing business and strengthened

corporate governance norms.

o Mandated that financial statements require the signature of the Chief

Executive Officer (CEO).

3. Companies (Amendment) Act, 2019

• Key Changes:

o Re-categorized certain offenses as civil defaults, reducing the burden on

criminal courts.

o Enhanced accountability with stricter norms for corporate social

responsibility (CSR) spending.
4. Companies (Amendment) Act, 2020

• Key Changes:

o Further decriminalized various minor procedural and technical lapses under

the Act.

o Allowed direct listing of securities by Indian companies in permissible

foreign jurisdictions.

o Introduced a new chapter for producer companies, providing a structured

framework for their operation.

5. Companies (Amendment) Rules, 2023

• Key Changes:

o On October 20, 2023, the Ministry of Corporate Affairs (MCA) notified

amendments to the Companies Incorporation Rules, 2014.

o These amendments aim to streamline the incorporation process and reduce

compliance burdens.

1. Historical Origin of Company Law in India and Important Definitions under the
Companies Act, 2013

Historical Origin:
The concept of companies and company law in India evolved under British rule.

• East India Company: The first instance of corporate governance in India began with
the East India Company in 1600.

• Indian Companies Act, 1850: This was the first legislative framework in India for
companies, modeled after the UK Companies Act.

• Indian Companies Act, 1913: This replaced the 1850 Act and formed the basis for
corporate governance in India.

• Companies Act, 1956: After independence, this Act regulated company laws
extensively.

• Companies Act, 2013: This modern law replaced the 1956 Act and governs all
aspects of companies, ensuring better transparency, accountability, and governance.

Important Definitions under the Companies Act, 2013:

 • Company (Section 2(20)): "A company means a company incorporated under this Act
or under any previous company law."

• Body Corporate (Section 2(11)): Includes any company, corporation, or corporate

entity except cooperative societies and other exempted bodies.

• Private Company (Section 2(68)): A company with restrictions on share transfer, a

maximum of 200 members, and prohibition on public subscription.

• Public Company (Section 2(71)): A company that is not a private company and allows
shares to be offered to the public.

• One Person Company (Section 2(62)): A company with only one member.

Nature and Characteristics of a Company

Since a corporate body (i.e. a company) is the creation of law, it is not a human being, it is an
artificial juridical person (i.e. created by law); it is clothed with many rights, obligations,
powers, and duties prescribed by law; it is called a ‘person’. Being the creation of law, it
possesses only the powers conferred upon it by its Memorandum of Association which is the
charter of the company. Within the limits of powers conferred by the charter, it can do all
acts as a natural person may do

1. Company a Legal Person /Artificial Legal Person"

o A company is an artificial legal person, not a natural person.

o It exists only in the eyes of the law and cannot act on its own.

o A company acts through its board of directors, who are elected by

shareholders.

o In Bates v. Standard Land Co., it was stated that directors are the "brains" of
the company, while the company itself is the "body."

o A company can:

▪ Acquire and dispose of property.

▪ Enter into contracts in its own name.

▪ Sue or be sued in its own name.

o A company is not a citizen and cannot enjoy rights under the Constitution of
India or the Citizenship Act.

o In State Trading Corporation of India v. CTO (1963), the Supreme Court ruled
that constitutional and citizenship rights do not apply to companies.
 o A company does not possess fundamental rights but is still a "person" in the
eyes of the law.

o A company can enter into contracts with:

▪ Its directors

▪ Its members

▪ Outsiders

Justice Hidayatullah's Observation:

o Even if all the members of a company are Indian citizens, the company itself
does not become a citizen of India.

2. Separate Legal Entity: A company is a legal person and entirely distinct from its
members, is capable of owning, enjoying and disposing of property in its own name.
The company is the real person in which all its property is vested, and by which it is
controlled, managed and disposed of.
3. Perpetual Succession: A company has a continued existence. Unlike other non-
registered business entities, a company is a stable business organization. Its life
doesn’t depend on the life of its shareholders, directors, or employees. Members may
come and go but the company goes on forever. However, its life may be put to an end
as per the procedure laid under the act.
4. Common Seal"

o A company, as an artificial legal person, has no body, mind, or soul and cannot
physically sign documents.

o The common seal acts as the official signature of the company, bearing its
name, to bind the company to legal documents.

o Any document with the common seal is considered legally binding on the
company.

o Initially, the use of a common seal was mandatory for providing

authorizations and attestations.

o The latest amendments to the Companies Act, 2013, have made the common
seal optional.

o In the absence of a common seal, the company can authorize:

▪ Two directors, or
 ▪ One director and the company secretary (if appointed), to sign
documents on its behalf.

5. Limited Liability: The term ‘limited’ means something which is defined or specific. It
means an obligation to pay to creditors. A liability can be either limited or unlimited.
Limited liability can be of two types namely limited by share and limited by guarantee.
Liability limited by share refers to as a condition as per which shareholders are legally
liable to pay the debts of a company only to the extent of the nominal value of their
shares.

Doctrine of Corporate Veil

The Doctrine of Corporate Veil refers to the legal principle where a company is treated as a
separate legal entity, distinct from its shareholders, directors, and officers. However, in
certain situations, courts may disregard this separation and "lift the corporate veil" to hold
individuals behind the company accountable for its actions.

Key Aspects

1. Meaning:

o A company, being a separate legal entity, has its own rights and liabilities,
separate from its members.

o The corporate veil shields the members and directors from personal liability
for the company's acts.

2. Purpose of the Doctrine:

o Protects shareholders from being personally liable for the debts or

misconduct of the company.

o Ensures that the company operates independently of its members.

3. Lifting the Corporate Veil:

o In certain cases, courts may pierce the corporate veil and look beyond the
company to hold individuals liable.

o This is done to prevent fraud, misuse of the corporate structure, or to enforce

justice.

Legal Provisions and Cases

1. Fraud or Improper Conduct

• Courts lift the corporate veil to prevent fraud or unlawful activities conducted under
the guise of the company.

• Case Law: Gilford Motor Co. v. Horne

o The company was a sham set up to evade contractual obligations.

2. Avoidance of Legal Obligations

• When individuals use the company to evade legal responsibilities.

• Case Law: Jones v. Lipman

o A company was formed to avoid a contract, and the court pierced the veil.

3. Tax Evasion

• Courts lift the veil to identify individuals hiding behind the company to avoid paying
taxes.

4. Statutory Provisions

• Specific provisions under the Companies Act, 2013 allow lifting of the veil in cases
like:

o Misstatements in prospectus.

o Fraudulent business activities.

5. Public Interest

• When the company’s actions harm the public or are against public policy.

Observations from Indian Cases

1. State of U.P. v. Renusagar Power Co.

o The Supreme Court held that the corporate veil can be lifted in cases of tax
evasion or fraud.

2. Delhi Development Authority v. Skipper Construction Co.

o The court pierced the veil to prevent misuse of the corporate structure to
defraud individuals.

Exceptions Where Veil is Lifted

 1. To identify the true nature of the company (e.g., to determine whether it is being
used as a facade).

2. When the company is a mere sham or façade.

3. To trace profits or property held unlawfully by the company.

4. To identify the real beneficiaries behind the corporate structure.

Conclusion

The Doctrine of Corporate Veil is a cornerstone of corporate law, ensuring that companies
function as separate legal entities. However, when this legal structure is misused for fraud,
illegal activities, or evasion of obligations, courts are empowered to lift the veil and hold
individuals accountable. This doctrine strikes a balance between protecting the legal
independence of companies and upholding justice and fairness.

Formation of a Company, Certificate of Incorporation, Pre-Incorporation Contracts, and

Commencement of Business

2. Formation of a Company

The process of forming a company involves several steps and is governed by the Companies
Act, 2013. The key stages are:

Stages of Formation:

1. Promotion:

o The initial step where an idea for a business is conceived. Promoters play a
vital role in this stage by performing activities like feasibility studies, gathering
funds, and preparing essential documents.

o Legal Provisions:
 ▪ Section 2(69) of the Companies Act defines a "promoter" as a person
who is named as such in the prospectus or identified by the company.

2. Incorporation:

o Filing the necessary documents with the Registrar of Companies (ROC) to

legally form the company.

o Documents Required (Section 7):

▪ Memorandum of Association (MOA)

▪ Articles of Association (AOA)

▪ Declaration by professionals

▪ Details of directors, subscribers, and their consent (Form INC-9, DIR-2)

▪ Proof of registered office

3. Subscription of Capital:

o Public companies (if applicable) must raise the necessary capital through the
issue of shares.

4. Commencement of Business:

o After obtaining the Certificate of Incorporation and meeting capital

requirements, the company can start operations (detailed below).

3. Certificate of Incorporation

The Certificate of Incorporation is the legal document issued by the Registrar of Companies
(ROC) under Section 7(2) of the Companies Act, 2013. It signifies that the company has been
officially registered and recognized as a separate legal entity.

Legal Provisions:

1. Authority to Issue:

o Issued by the ROC after verifying all submitted documents.

2. Conclusive Evidence (Section 7(7)):

o The Certificate of Incorporation is conclusive evidence that all registration

requirements have been fulfilled. It cannot be challenged once issued, even if
irregularities are discovered later.

3. Details Included:
 o Name of the company

o Registration number (CIN – Corporate Identification Number)

o Date of incorporation

4. Importance:

o Grants legal status to the company.

o Acts as proof of existence for various transactions.

4. Pre-Incorporation Contracts

A Pre-Incorporation Contract is an agreement entered into by promoters on behalf of a

company that is yet to be incorporated. These contracts are essential for setting up the
company, such as leasing office space, hiring employees, or procuring materials.

Legal Provisions:

1. Position under Indian Law:

o According to the Companies Act, 2013, pre-incorporation contracts are not

automatically binding on the company.

2. Enforceability (Section 15 of the Specific Relief Act, 1963):

o A company may ratify a pre-incorporation contract after incorporation,

making it binding.

o For a contract to be enforceable:

▪ The company must have explicitly adopted it after incorporation.

▪ The contract must benefit the company.

3. Promoter’s Liability:

o If the company does not ratify the contract, the promoter remains personally
liable.

4. Case Law:

o Kelner v. Baxter (1866): Held that a company cannot be bound by contracts

made before its existence.

5. Commencement of Business
Once a company is incorporated, certain conditions must be fulfilled to officially start
business operations.

Provisions under Companies Act, 2013:

1. Private Companies:

o Private companies can start business operations immediately after receiving

the Certificate of Incorporation.

2. Public Companies (Section 10A):

o Public companies must file a declaration with the ROC confirming the receipt
of the minimum subscription amount for shares.

o The company must also file verification of its registered office address within
30 days of incorporation.

3. Consequences of Non-Compliance:

o If a company fails to file the required declarations, it cannot commence

business and may face penalties.

Key Steps to Commence Business:

1. Declaration (Form INC-20A):

o The company must declare that it has met the conditions for starting business
activities.

2. Bank Account:

o The company must open a bank account and deposit the minimum
subscription amount (if applicable).

3. Verification of Registered Office:

o Filing Form INC-22 to confirm the address of the registered office.

Significance of Commencement of Business:

• It ensures that the company has adequate funds to begin operations.

• It acts as a safeguard against shell companies or fraudulent incorporations.