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FORMS OF CORPORATIONS & NON-CORPORATE ORGANISATIONS
QUESTION BANK
Q.1 Define company. Explain its characteristics.
Q.2 Define company. Distinguish between the company and other forms of association.
Q.3 Define company. Explain the advantages of the company.
Q.4 Define company. Distinguish between company and partnership.
Q.5 Define company. What are the different types of companies?
Q.6 Define the kinds of companies. Discuss the nature and advantages of Government companies.
Q.7 Write a detailed note on the kinds of companies.
Q.8 What is a private company? When can it become a public company?
Q.9 The Company is invisible, intangible and exists only in the eyes of the law. Explain.
Q.10 Define Company and explain the special features of the company.
Q.11 Explain in detail the meaning of the company and the advantages of Incorporation in detail.
SHORT NOTES
(1) Lifting the corporate veil.
(2) Holding Company and Subsidiary Company.
(3) Saloman V/s Saloman.
(4) Certificate of commencement of business.
SYNOPSIS
I. Introduction: The Paradigm Shift-
1. Overriding Effect of the Modern Act
2. Major Amendments
II. Definition of a Company-
1. Statutory Definition —
2. Common Law Formulations:
Chief Justice Marshall (US Supreme Court):
III. Characteristics of a Company
1. Independent Corporate Personality (Section 9)
2. Perpetual Succession
3. Limited Liability
4. Separate Property
5. Transferability of Shares (Section 44)
6. Capacity to Sue and Be Sued
IV. KINDS OF COMPANIES
A. Statutory Companies (Public Corporations)
1. Oversight:
2. Financing:
3. Legal Status:
B. Companies Registered under the Companies Act
1. Private Company [Section 2(68)]
a. Restricts Share Transfer:
b. Caps Membership:
c. Prohibits Public Invitations:
d. Important Advantage:
2. Public Company [Section 2(71)]
3. Unlimited Company [Section 2(92)]-
4. Limited Company-
a. Company Limited by Shares [Section 2(22)]:
b. Company Limited by Guarantee [Section 2(21)]:
5. Government Company [Section 2(45)]
6. Holding and Subsidiary Companies [Section 2(87)]
7. Foreign Company [Section 2(42)]
Statutory Compliances for Foreign Companies:
8. One-Person Company (OPC) [Section 2(62)]
9. Illegal Associations (Section 464)
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NOTES
THE DOCTRINE OF LIFTING THE CORPORATE VEIL
I. Meaning and Justification
II. Judicial and Statutory Grounds for Piercing the Veil
1. Judicial Grounds
a. Determination of Character and Enemy Status
b. Prevention of Tax Evasion
c. Prevention of Fraud, Sham, or Improper Conduct
Limits on Information Piercing:
d. Agency or Sham Public Instruments
2. Statutory Grounds under the 2013 Act
a. Misdescription of Name (Section 12):
b. Fraudulent Conduct of Business (Section 339):
c. Investigation of Corporate Ownership (Section 216):
Corporate Law: The Framework of the Companies Act, 2013
I. Introduction: The Paradigm Shift-
The Companies Act, 1956, which consolidated and amended the law relating to companies and commercial associations, served as the bedrock of Indian corporate jurisprudence for over half a century. However, to accelerate economic growth, simplify cross-border investments, and adapt to a digitized global economy, a complete overhaul became necessary. Consequently, Parliament enacted the Companies Act, 2013, completely repealing the 1956 Act.
The Companies Act, 2013 represents a more streamlined and rule-based approach to corporate governance. While the legacy 1956 Act was bulky—containing 658 sections and 15 schedules—the 2013 Act contains 470 sections and 7 schedules. The modern Act introduces progressive corporate models, expands the rights of minority shareholders, simplifies mergers, and introduces a comprehensive regime for Corporate Social Responsibility (CSR).
1. Overriding Effect of the Modern Act
Case Law: Helios & Matheson Information Technology Ltd. v. State, (2015) SCC OnLine Mad 14041
Ruling: The Madras High Court clarified that the provisions of the Companies Act, 2013 override and supersede those of the Companies Act, 1956. The Court denied a company’s petition to raise public deposits in violation of Section 74(1) of the 2013 Act, ruling that even if such deposits were permissible under the legacy 1956 Act, the modern statutory compliance window is absolute and mandatory.
2. Major Amendments
The 2013 Act is a dynamic piece of legislation that has been amended multiple times (including in 2015, 2017, 2019, and 2020) to promote ease of doing business:
a.The Companies (Amendment) Act, 2015: Removed the restrictive requirement of a minimum paid-up share capital for both private and public companies.
b. The Companies (Amendment) Act, 2020: Decriminalized a large number of minor procedural or technical offenses, shifting them from criminal penalties to civil monetary penalties. It also structurally integrated Chapter XXI-A to govern Producer Companies directly under the Act.
c. The Socio-Economic Need for a Company
Commercial corporations are the primary engines of national economic development, fulfilling two main functions:
i. Capital Pooling and Scale: A company provides a structural mechanism to aggregate large amounts of investment capital from thousands of individual investors, a feat that is beyond the financial capacity of individual proprietors or traditional partnerships.
ii. Professional Management: By separating ownership (shareholders) from day-to-day corporate control, operations are managed by a specialized Board of Directors and skilled executive teams.
iii. Distribution of Wealth and Goods: Profits are distributed among many shareholders via dividends rather than being concentrated under a single owner. Furthermore, modern companies act as instruments of social change, balancing profit-making with public interests, consumer protection, and employee welfare.
II. Definition of a Company-
1. Statutory Definition — Section 2(20): > “Company” means a company incorporated under this Act or under any previous company law.
2. Common Law Formulations: Lord Justice Lindley: "An association of many persons who contribute money or money's worth to a common stock and employ it for a common purpose."
Chief Justice Marshall (US Supreme Court): "A person, artificial, invisible, intangible, and existing only in contemplation of law."
Lord Buckley: "The term company involves two ideas: first, that the members of the association are so numerous that it cannot be described as a firm or a partnership; and secondly, that the consent of all the other members is not required to the transfer of a member’s interest."
III. Characteristics of a Company
1. Independent Corporate Personality (Section 9)
Upon registration and the issuance of a Certificate of Incorporation, a company becomes a separate, artificial juristic person in the eyes of the law. Its legal existence is entirely distinct from the individual human beings who promote it, own its shares, or manage its operations. Unlike a partnership firm, where the assets of the firm are legally the shared property of the partners, a company owns its assets independently.
Case Law: Salomon v. A. Salomon & Co. Ltd., [1897] AC 22
Facts: Salomon, a successful leather merchant, incorporated a limited liability company. He took 20,001 shares himself, while his wife and five children took one single share each. He also advanced a loan to the company, secured by a floating charge debenture. When the business failed and went into liquidation, its liabilities exceeded its assets. The unsecured creditors argued that the company was a mere sham, that it was identical to Salomon himself, and that his secured debentures should be bypassed to pay external debts first.
Ruling: The House of Lords rejected the creditors' arguments and firmly established the Doctrine of Corporate Personality. The Court ruled that once a company is legally incorporated, it becomes a distinct legal entity separate from its shareholders. Even if one individual holds virtually the entire share capital, the company does not act as his agent or trustee in the absence of fraud. Therefore, Salomon's secured debt took legal priority over unsecured claims.
2. Perpetual Succession
An artificial juristic person has no natural lifecycle: it cannot fall ill, become insane, or die. Its existence is terminated only through the formal process of statutory winding up or liquidation. As Professor L.C.B. Gower observed:
"Members may come and members may go, but the company goes on forever."
Even if all members of a company are killed simultaneously by a disaster while assembled in a general meeting, the legal entity survives intact. The transfer, inheritance, or forfeiture of shares does not alter the continuity of the corporation.
3. Limited Liability
In a limited liability company, the personal financial liability of individual shareholders is strictly confined to the nominal or face value of the shares they have agreed to buy. If a shareholder buys a share with a face value of 100 and has already paid 60, their remaining liability is strictly capped at the remaining 40. Once a share is fully paid up, the shareholder's personal assets cannot be attached to settle the company's debts, even if the corporation enters insolvency.
4. Separate Property
Because a company is an independent legal person, all corporate money, real estate, and intellectual property belong to the company itself, not to its members. A shareholder has no direct legal or equitable interest in the specific physical assets owned by the corporation; they merely hold a personal right to participate in profits via dividends and attend general meetings.
5. Transferability of Shares (Section 44)
Under Section 44, shares or other securities of a company are classified as movable property and are freely transferable in the manner provided by the company’s Articles of Association (AoA). This transferability serves a dual purpose:
a. It provides liquidity to investors, allowing them to sell shares and recover capital in the open stock market without destabilizing the company's financial base.
b. It ensures commercial stability for the corporation, as its capital remains locked within its accounts while its ownership base updates dynamically.
6. Capacity to Sue and Be Sued
A company can protect its corporate rights by bringing actions in civil, criminal, and constitutional courts in its own corporate name. Conversely, third parties or public regulatory bodies can sue the company directly without naming its individual shareholders or directors.
IV. KINDS OF COMPANIES
A. Statutory Companies (Public Corporations)
A statutory company is a corporate entity established directly by a Special Act passed by Parliament or a State Legislature. These entities are also known as public corporations.
1. Oversight: The competent Minister is answerable to the legislature for the corporation's performance, and its audited annual reports must be tabled before the House.
2. Financing: They raise capital by borrowing from the public or financial markets, backed by sovereign guarantees from the state treasury.
3. Legal Status: Although they are state instrumentalities under Article 12 of the Constitution, they maintain an independent legal personality separate from government departments. Their employees are governed by independent service regulations and are not civil servants. Examples include the Reserve Bank of India (RBI), Life Insurance Corporation of India (LIC), and the Food Corporation of India (FCI).
B. Companies Registered under the Companies Act
1. Private Company [Section 2(68)]
A Private Company is a corporate model designed for family concerns, small businesses, or closely held enterprises. Under Section 2(68), a private company means a company which has a minimum paid-up share capital as may be prescribed, and which by its Articles of Association:
a. Restricts Share Transfer: Imposes strict limitations on the right of its members to transfer shares to outsiders, preserving its closely held nature.
b. Caps Membership: Limits the maximum number of its members to 200 (excluding current and former employees who became members during their employment). If two or more persons hold shares jointly, they are counted as a single member.
c. Prohibits Public Invitations: Imposes an absolute ban on any invitation or prospectus to the public to subscribe for any securities (shares, debentures, or deposits) of the company.
d. Important Advantage: A private company can be incorporated with just two members and two directors. Following the Companies (Amendment) Act, 2015, the historical requirement of maintaining a minimum paid-up capital of â‚ą1,00,000 was abolished.
2. Public Company [Section 2(71)]
A Public Company is a corporate form intended for larger commercial enterprises that require substantial capital from public markets. Under Section 2(71), a public company means a company which:
a. Is not a private company;
b. Has a minimum paid-up share capital as may be prescribed (the 2015 Amendment abolished the old minimum of â‚ą5,000,000);
c. Open Shareholder Base: Requires a minimum of seven members, with no ceiling or restriction on the maximum number of shareholders. Its shares are freely tradeable on public stock exchanges.
d. Subsidiary Rule: A private company that functions as a subsidiary of a public company is deemed to be a public company under the Act, losing its private exemptions.
Important Differences: Public vs. Private Companies
Feature | Private Company [Section 2(68)] | Public Company [Section 2(71)] |
Minimum Members | 2 members | 7 members |
Maximum Members | 200 members | Unlimited (uncapped) |
Transferability | Strictly restricted by the Articles | Freely transferable |
Public Subscription | Total statutory prohibition | Permitted via Prospectus |
Minimum Directors | Minimum 2 directors | Minimum 3 directors |
Rotational Retirement | Directors need not retire by rotation | At least 2/3rds are subject to rotational retirement |
3. Unlimited Company [Section 2(92)]-
An Unlimited Company is a corporate structure where there is no statutory limit on the personal liability of its members. If the company faces winding up and its assets are insufficient to cover its liabilities, the liquidator can look to the personal assets of the shareholders to clear the debts, similar to partners in a traditional firm. However, unlike a partnership, an unlimited company retains an independent legal personality and perpetual succession. Under Section 65, an unlimited company can subsequently pass a special resolution to convert itself into a limited company.
4. Limited Company-
A limited company is a structure where the financial liability of its members is capped. This is divided into two distinct models:
a. Company Limited by Shares [Section 2(22)]: The most common corporate form, where a member's financial risk is strictly limited to the amount, if any, remaining unpaid on the shares they hold.
b. Company Limited by Guarantee [Section 2(21)]: A structure where the liability of its members is limited by its Memorandum of Association (MoA) to an explicit amount that each member promises to contribute to the assets of the company if it undergoes winding up or liquidation. This model may or may not have a share capital and is typically chosen for non-profit organizations, trade associations, or scientific societies.
5. Government Company [Section 2(45)]
A Government Company is any company in which not less than 51% of the paid-up share capital is held by the Central Government, by any State Government(s), or partly by the Central Government and partly by one or more State Governments. It explicitly includes any corporate entity that is a subsidiary of an existing Government Company.
a. Audit Regime (Section 394): The accounts of a Government Company are audited under the direct oversight of the Comptroller and Auditor General of India (CAG), who appoints its statutory auditors and enjoys the power to conduct supplementary or test audits.
b. Parliamentary Accountability: The management must compile an annual report detailing the company's operations within three months of its Annual General Meeting (AGM). This report must be formally tabled before both Houses of Parliament or the relevant State Legislature.
c. Insolvency Status: *Case Law: Nagendra Kumar Jain v. District Judge, Moradabad, AIR 2001 All 289
Ruling: If a Government Company becomes unable to clear its financial debts, the proper remedy is to initiate statutory winding up proceedings under corporate law, rather than seeking personal insolvency declarations against the management or its state representatives.
6. Holding and Subsidiary Companies [Section 2(87)]
This defines the relationship between two distinct corporate entities where one exercises structural control over the other. Under Section 2(87), a company is deemed to be a subsidiary of another (the holding company) if the holding company:
a. Controls the composition of its Board of Directors (i.e., can appoint or remove a majority of the directors);
b. Exercises or controls more than one-half (50%) of its total voting power, either directly or through one or more of its other subsidiary companies.
The Chain Rule: If Company C is a subsidiary of Company B, and Company B is a subsidiary of Company A, then Company C is automatically treated as a subsidiary of Company A.
To protect corporate assets, a subsidiary company cannot buy or hold shares in its holding company, and any such transfer is void, except where the subsidiary acts as a legal representative or trustee.
7. Foreign Company [Section 2(42)]
A Foreign Company means any company or body corporate incorporated outside the territory of India which:
a. Has an established place of business in India, whether by itself, through an agent, physically, or through a digital/electronic commerce mode; and
b. Conducts any commercial or business activity in India in any other manner.
Under Section 379, if not less than 50% of the paid-up share capital (whether equity, preference, or mixed) of a foreign company is held by Indian citizens, Indian corporate bodies, or a combination of both, that company must comply with all the provisions of Chapter XXII of the Act, treating it with the same level of regulatory strictness as if it were an Indian company.
Statutory Compliances for Foreign Companies:
a. Filing Requirements (Section 380): Within 30 days of establishing a place of business in India, a foreign company must deliver several documents to the Registrar of Companies (RoC), including a certified copy of its Charter/MoA & AoA (with certified English translations if necessary), the full address of its principal office, a list of directors, and the names of authorized representatives in India designated to accept service of legal process.
b. Financial Accounts (Section 381): Must compile a balance sheet and profit and loss statement regarding its Indian business operations for every calendar year and file three copies with the RoC.
c. Name Display (Section 382): Must clearly display its name and country of incorporation in English and the local vernacular language outside all offices and places of business in India.
8. One-Person Company (OPC) [Section 2(62)]
The 2013 Act introduced the concept of the One-Person Company (OPC). Section 2(62) defines an OPC as a private company that has only one person as its member. This model allows individual entrepreneurs to operate with limited liability, eliminating the traditional partnership requirement of finding a second shareholder while retaining a distinct corporate identity.
9. Illegal Associations (Section 464)
Under Section 464, no association or partnership consisting of more than a prescribed number of persons (currently capped at 50 by the Companies (Management and Administration) Rules, 2014, though the statute allows a ceiling up to 100) can be formed to carry on a business for profit unless it is formally registered as a company under this Act.
a. Exceptions: This restriction does not apply to a Joint Hindu Family (HUF) carrying on a traditional family business, or to professional partnerships (such as Chartered Accountants or Advocates) governed by specialized acts of Parliament.
b. Legal Consequences: Any association that breaches this limit becomes an Illegal Association. Every member of such an association is personally liable for all debts incurred in the business and can face a criminal fine extending up to â‚ą1,00,000.
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NOTES
THE DOCTRINE OF LIFTING THE CORPORATE VEIL
I. Meaning and Justification
The Doctrine of Lifting the Corporate Veil is the primary judicial exception to the principle of independent corporate personality established in Salomon's case. Corporate personality acts as a legal veil that screens the shareholders from personal liability for the company's actions. However, if unscrupulous individuals use this screen as a device to evade taxes, commit fraud, bypass statutory obligations, or protect illegal acts, the courts and tribunals (NCLT) will pierce or lift that veil. They will look past the artificial entity to identify and punish the individual human beings pulling the strings.
Case Law: Lee v. Lee’s Air Farming Ltd., [1961] AC 12
Facts: Lee incorporated an aerial top-dressing company, holding 2,999 out of 3,000 shares. He appointed himself as the Managing Director and, by separate contract, employed himself as the company's chief pilot. While flying on company business, he was killed in an aviation accident. His widow claimed statutory compensation under the Workers' Compensation Act. The company's insurers opposed the claim, arguing that because Lee was the absolute owner and controller of the company, he could not be an "employee" under a contract of service with himself.
Ruling: The Privy Council upheld the Salomon precedent, ruling that a company is an independent legal person distinct from its founder. A person can concurrently hold the separate legal capacities of majority shareholder, director, and employee. Therefore, Lee's employment contract was valid, and his widow was fully entitled to receive worker's compensation.
II. Judicial and Statutory Grounds for Piercing the Veil
The corporate veil can be lifted under specific scenarios categorized into judicial precedents and explicit statutory provisions:
1. Judicial Grounds
a. Determination of Character and Enemy Status
During wartime, courts will lift the corporate veil to inspect the nationality of the individual shareholders who control the company. This ensures that domestic funds are not inadvertently routed to an enemy nation.
Case Law: Daimler Co. Ltd. v. Continental Tyre & Rubber Co. (Great Britain) Ltd., [1916] 2 AC 307
Facts: A company was incorporated in England to sell motor vehicle tires manufactured in Germany by a German parent corporation. All its shares except one were held by German citizens, and all its directors were German residents. Following the outbreak of World War I between Britain and Germany, the company brought an action in England to recover a commercial trade debt. The debtor (Daimler) argued that paying the company would constitute illegal trading with the enemy.
Ruling: The House of Lords held that while the company was technically registered in England, its structural control and management were entirely in enemy hands. The Court pierced the veil, ruling that the company had assumed an "enemy character" and could not maintain a lawsuit during the war.
Indian Application: In Hyderabad (Sind) Electric Supply Co. Ltd. v. Union of India, AIR 1959 Punj 199, the court noted that where a company was registered in Sindh (which became Pakistan post-partition) and its operational base never moved, it remained a foreign company. This held true even if 80% of its shareholders migrated to India, because the structural location of the registered corporate seat overrides changes in shareholder residence.
b. Prevention of Tax Evasion
If an enterprise creates a network of shell companies for the sole purpose of splitting income and evading tax liabilities, the courts will look past the corporate structures and aggregate the income under the principal individual. (See: Re Dinshaw Maneckjee Petit, AIR 1927 Bom 371).
c. Prevention of Fraud, Sham, or Improper Conduct
The courts will not permit corporate personality to be used as a shield to carry out fraud or evade a pre-existing contractual obligation.
Case Law: Gilford Motor Co. Ltd. v. Horne, [1933] Ch 935
Facts: Horne, a former managing director of the plaintiff company, signed a non-compete covenant promising not to solicit the customers of his former employer. To circumvent this restriction, he incorporated a separate company, appointed his wife and an associate as directors, and used this new entity to solicit the plaintiff's clients.
Ruling: The Court of Appeal pierced the corporate veil, describing the new company as a "mere cloak or sham" created solely to breach a legal covenant. The court granted an injunction against both Horne personally and his corporate entity.
Limits on Information Piercing: In Association for Democratic Reforms v. Union of India, (2021), the Supreme Court observed that because the financial accounts and statutory filings of registered companies are already open to the public under the disclosure rules of the Companies Act, there is no need to pierce the corporate veil to access documents that are already part of the public domain.
d. Agency or Sham Public Instruments
The corporate veil can be lifted to determine if a public sector company is operating as an integrated agent of the State, helping courts decide whether fundamental rights can be enforced against it under Article 12.
2. Statutory Grounds under the 2013 Act
The Act contains specific provisions that automatically pull back the corporate veil to penalize individual management personnel:
a. Misdescription of Name (Section 12): If an officer signs an official bill, check, invoice, or business letter without properly displaying the full registered name of the company, the corporate veil is lifted, and that officer can be held personally liable to the holder for the amount due.
b. Fraudulent Conduct of Business (Section 339): If, during the winding up of a company, it is discovered that its business was conducted with the intent to defraud creditors or for any fraudulent purpose, the NCLT can lift the veil. It can declare that any directors or managers who were knowingly party to the fraud possess unlimited personal liability for all the company's debts.
c. Investigation of Corporate Ownership (Section 216): The Central Government can appoint inspectors to investigate and look past the legal owners of record to identify the true individuals who have a financial interest in the company or control its policy decisions.
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