Dr. J J Irani Expert Committee on Company Law had submitted its report charting out the road map for a flexible, dynamic and user-friendly new company law.
A Committee was constituted on 2nd December, 2004 under the Chairmanship of Dr. J J Irani, the then Director, Tata Sons.
The Expert Committee had recommended that private and small companies need to be given flexibilities and freedom of operations and compliance at a low cost. Companies with higher public interest should be subject to a stricter regime of Corporate Governance. Government companies and public financial institutions should be subject to similar parameters with respect to disclosures and Corporate Governance as other companies are subjected to.
The Report of the Committee had sought to bring in multifarious visionary concepts which if accepted and acted upon would really simplify the voluminous and cumbersome Companies Act in the country.
The Companies Act, 2013 received the assent of the President on August 29, 2013 and was notified in the Gazette of India on 30.08.2013.
The Companies Act, 2013 introduced new concepts supporting enhanced disclosure, accountability, better board governance, better facilitation of business and so on. It includes associate company, one person company, small company, dormant company, independent director, women director, resident director, special court, secretarial standards, secretarial audit, class action, registered valuers, rotation of auditors, vigil mechanism, corporate social responsibility, E-voting etc.
The Companies Act, 2013 has undergone amendments four times so far:
The Ministry has come out with several circulars, notifications, Orders and various amendment rules to facilitate better and smooth implementation of the Act.
This whole ecosystem is called the Companies Law and should be read collectively and comprehensive as described below:
The word ‘company’ is derived from the Latin word (Com=with or together; panis =bread), and it originally referred to an association of persons who took their meals together.
Under Law a company is a corporate body and a legal person having status and personality distinct and separate from the members constituting it.
In the legal sense, a company is an association of both natural and artificial persons and is incorporated under the existing law of a country.
An incorporated company owes its existence either to a Special Act of Parliament or to company law. Public corporations like Life Insurance Corporation of India, SBI etc., have been brought into existence through special Acts of Parliament, whereas companies like Tata Steel Ltd., Reliance Industries Limited have been formed under the Company law i.e. Companies Act, 1956 which is replaced by the Companies Act, 2013.
The word ‘company’ is derived from the Latin word (Com=with or together; panis =bread), and it originally referred to an association of persons who took their meals together. On other hand, the word ‘corporation’ is derived from the Latin term ‘corpus’ which means ‘body’. Accordingly, ‘corporation’ is a legal person created by a process other than natural birth.
The term “Company” is defined under section 2(20) of the Companies Act, 2013, “company” means a company incorporated under this Act or under any previous company law. On the other hand, the term “Corporation” is defined under section 2(11) of the Companies Act, 2013, “corporation” includes a company incorporated outside India but does not include:
In nutshell, the term “Corporation” or Body Corporate” is wider than the word “Company”.
A company incorporated under the Act is vested with a corporate personality so it bears its own name, acts under name, may has a seal of its own and its assets are separate and distinct from those of its members. It is a different ‘person’ from the members who compose it.
Its shareholders are its notional owners and do not own anything in it except ownership of shares issued and they can be its creditors simultaneously.
A shareholder cannot be held liable for the acts of the company even if he holds virtually the entire share capital.
The shareholders are not agents of the company and so they cannot bind by their acts.
Thus, it is capable of owning property, incurring debts, borrowing money, having a bank account, employing people, entering into contracts and suing or being sued in the same manner as an individual.
Note: Refer Relevant Case Decided Case Laws on Corporate Personality in Topic 1.12:
Note: Refer Relevant Case Decided Case Laws on Company as an artificial person in Topic 1.12:
The company being a legal person is not a citizen under the Citizenship Act, 1955 or the
Constitution of India. Section 2(f) of Citizenship Act, 1955 expressly excludes a company or association or body of individuals from citizenship. Certain fundamental rights enshrined in the Constitution for protection of “person”, e.g., right to equality (Article 14) etc. are also available to company.
Note: Refer Relevant Case Decided Case Laws on Company is not a citizen in Topic 1.12:
As per judicial decisions it was established that a company cannot be a citizen yet it has nationality, domicile and residence. A limited company is capable of having a domicile and its domicile is the place of its registration and that domicile clings to it throughout its existence. Note: Refer Relevant Case Decided Case Laws on “Company has Nationality and Residence “in Topic 1.12: Tulika v. Parry and Co., (1903).
The members may derive profits without being burdened with the management of the company. They do not have effective and intimate control over its working and they elect their representatives as Directors on the Board of Directors of the company to conduct corporate functions through managerial personnel employed by them.
The company being a separate person is the owner of its assets and bound by its liabilities. The Members even as a whole are neither the owners of the company’s undertakings nor liable for its debts.
A shareholder is liable to pay the balance, if any, due on the shares held by him, when called upon to pay and nothing more, even if the liabilities of the company far exceed its assets. This means that the liability of a member is limited. Also, there are few exceptions to the principle of limited liability. (For Exceptions refer Topic 1.4 of this Chapter on Next Page).
Note: Refer Relevant Case Decided Case Laws on Limited Liability in Topic 1.12:
Perpetual succession, means that the membership of a company may keep changing from time to time, but that shall not affect its continuity.
A company being a separate legal person is unaffected by death or departure of any member and it remains the same entity, despite total change in the membership.
A company being a legal person and entirely distinct from its members is capable of owning, enjoying and disposing of property in its own name.
Note: Refer Relevant Case Decided Case Laws on Separate Property in Topic 1.12:
The capital of a company is divided into parts, called shares. The shares are said to be movable property and subject to certain conditions, freely transferable so that no shareholder is permanently or necessarily wedded to a company. However there are restrictions with respect to transferability of shares of a Private Limited Company.
A company being a body corporate can sue and be sued in its own name. Note: Refer Relevant Case Decided Case Laws on Capacity to sue and be sued in Topic 1.12:
A company, being a legal entity different from its members, can enter into contracts for the conduct of the business in its own name. A shareholder cannot enforce a contract made by his company; he is neither a party to the contract, nor be entitled to the benefit derived from of it, as a company is not a trustee for its shareholders.
A company cannot go beyond the power stated in its Memorandum of Association. The actions and objects of the company are limited within the scope of its Memorandum of Association.
A company is a voluntary association for profit. It is formed for the accomplishment of some stated goals and whatsoever profit is gained is divided among its shareholders or saved for the future expansion of the company.
Exception: Only Section 8 company can be formed with no profit motive
A company, being an artificial juridical person, does not die a natural death. It is created by law, carries on its affairs according to law and effaced by law.
Ans.
The company being a legal person is not a citizen under the Citizenship Act, 1955 or the Constitution of India.
Ans.
As per judicial decisions it was established that a company cannot be a citizen yet it has nationality, domicile and residence. A limited company is capable of having a domicile and its domicile is the place of its registration and that domicile clings to it throughout its existence.
As per decided case law Tulika v. Parry and Co., (1903); it was observed that A joint stock company resides where its place of incorporation is where the meetings of the whole company or those who represent it are held and where its governing body meets in bodily presence for the purposes of the company and exercises the powers conferred upon it by statute and by the Articles of Association.
If at any time the number of members of a company is reduced below seven in the case of a public company and below two in the case of a private company and the company carries on business for more than six months while the number of members is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is cognisant of the fact that it is carrying on business with less than seven members or two members (as the case may be) shall be severally liable for the payment of the whole debts of the company contracted during that time and may be severally sued therefor. [Section 3A of Companies Act, 2013]
When the company is incorporated as an Unlimited Company. [Section 3(2)(c) of the Companies Act, 2013].
Where in the course of winding up it appears that any business of the company has been carried on with an intent to defraud creditors of the company or any other persons or for any fraudulent purpose, the Tribunal may declare the persons who were knowingly parties to the carrying on of the business in the manner aforesaid as personally liable without limitation of liability for all or any of the debts/liabilities of the company. [Section 339 of Companies Act, 2013].
Where it is proved that a prospectus has been issued with intent to defraud the applicants for the securities of a company or any other person or for any fraudulent purpose, every person who was a director at the time of issue of the prospectus or has been named as a director in the prospectus or every person who has authorised the issue of prospectus or every promoter or a person referred to as an expert in the prospectus shall be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by any person who subscribed to the securities on the basis of such prospectus.[Section 35(3) of Companies Act, 2013]
Where a company fails to repay the deposit or part thereof or any interest thereon referred to in section 74 within the time specified or such further time as may be allowed by the Tribunal and it is proved that the deposits had been accepted with intent to defraud the depositors or for any fraudulent purpose, every officer of the company who was responsible for the acceptance of such deposit shall, without prejudice to other liabilities, also be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by the depositors.[ Section 75(1) of Companies Act, 2013].
Where the report made by an inspector states that fraud has taken place in a company and due to such fraud any director, key managerial personnel other officer of the company or any other person or entity, has taken undue advantage or benefit, whether in the form of any asset, property or cash or in any other manner, the Central Government may file an application before the Tribunal for appropriate orders with regard to disgorgement of such asset, property, or cash and also for holding such director, key managerial personnel, officer or other person liable personally without any limitation of liability. [Section 224(5) of Companies Act, 2013].
Basis of
Distinction
Company
Company
A basic difference between an LLP and a company lies in that the internal governance structure of a company is regulated by statute (i.e. Companies Act) whereas for an LLP it would be by a contractual agreement between partners.
The management-ownership divide inherent in a company is not there in a limited liability partnership. LLP have more flexibility as compared to a company and have lesser compliance requirements as compared to a company.
The separate personality of a company is a statutory privilege and it must be used for legitimate business purposes only.
Where a fraudulent and dishonest use is made of the legal entity, the individuals concerned will not be allowed to take shelter behind the corporate personality. The Court will look behind the corporate entity and take action as though no entity separate from the members existed and make the members or the controlling persons liable for debts and obligations of the company.
Thus, the Court will break through the corporate shell and apply the principle/doctrine of lifting of or piercing the corporate veil.
The Companies Act, 2013 itself contains some provisions i.e. sections 7(7), 251(1) and 339 which lift the corporate veil to reach the real forces of action namely:
The Courts have found it necessary to disregard the separate personality of a company in the following situations:
Where small scale industries were given certain exemptions and the company owning an industry was controlled by some group of persons or companies, it was held that it was permissible to lift the veil of the company to see whether it was the subsidiary of another company and, therefore, not entitled to the proposed exemptions.
Where the defendant used the corporate structure as a device or facade to conceal his criminal activities i.e. evasion of customs and excise duties payable by the company. The Court could lift the corporate veil and treat the assets of the company as the realisable property of the shareholder.
According to section 1 of the Companies Act, 2013, the Act extends to whole of India and the provisions of the Act shall apply to the following:
Note: Companies Act, 2013 is not applicable to unincorporated companies.
Section 464 of the Companies Act, 2013 read with Rule 10 of the Companies (Miscellaneous) Rules, 2014, no association or partnership consisting of more than 50 persons shall be formed for the purpose of carrying on any business that has for its object the acquisition of gain by the association or partnership or by the individual members thereof unless it is registered as a company under this Act or is formed under any other law for the time being in force. The maximum number of persons which may be prescribed under this section shall not exceed 100.
Non-applicability of Illegal Association: Section 464 of the Act does not apply to –
As per provisions of section 455(1) of Companies Act, 2013, where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.
Note 1: “Inactive company” means a company which has not been carrying on any business or operation or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years.
Note 2: “Significant accounting transaction” means any transaction other than-
i. restricts the right to transfer its shares;
ii. except in case of One Person Company, limits the number of its members to two hundred:
Provided that where two or more persons hold one or more shares in a company jointly, they shall for the purposes of this clause 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;
Provided that nothing in this clause shall apply to—
i. controls the composition of the Board of Directors; or
ii. exercises or controls more than one-half of the total voting power either at its own or together with one or more of its subsidiary companies:
Note 2: The composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors.
Note 3: The expression “company” includes any body corporate.
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