What is Company Law?

Company Law is a body of provisions, rules and regulations which governs the functioning of a body corporate so as to ensure transparency and accountability. Company law is also known as Corporate law or Business law.

As per Cambridge dictionary, the definition of company law is the set of laws that control how businesses are formed and managed.

The nature of businesses can be of different kinds such as Proprietorship, Partnership Firm, Limited Liability Partnerships (LLPs), Companies, etc. There are various laws governing the businesses depending upon the nature of the businesses.

Meaning and Definition of a Company

A company means a legal association created by a group of individuals for operating a business or trade with a view to maximise wealth and profits.

In legal sense, a company is an artificial body or entity registered and incorporated under the Company Law, which has a separate legal existence independent of its members which enjoys many rights and powers as well as incurs liabilities as an artificial person.

According to Section 2(20) of the Companies Act, 2013, a company means a company incorporated under this Act or under any previous company law.

Professor Haney defines Company a-“A Company is an artificial person created by law, having separate entity, with a perpetual succession and common seal.”

Incorporation comes into existence either by the Special Act of Parliament or Company Law. Earlier, companies such as Reliance Industries Limited was registered and incorporated under the erstwhile Companies Act, 1956 which is replaced by the Companies Act, 2013.

The Companies Act, 2013 passed by the Parliament has received the assent of the President of India on 29^th August, 2013. The Act consolidates and amends the law relating to companies. The Act has 470 sections and 7 schedules. The Companies Act, 2013 is also applicable to companies engaged in the generation or supply of Electricity, Insurance, Banking, and etc subject to condition that it is not inconsistent with the provisions of the Special Acts of the Parliament which form such companies.

Essential Features of a Company

Since, a company is an artificial legal entity its rights and liabilities are independent of its members. It is a corporation created by law which can enjoy its rights and powers as a natural person as conferred upon it by its Memorandum of Association.

The basic and important features of a company are as follows:

1. Separate Legal entity:
   A company is a legal person separate from the members who create it. This is the reason why it has the capacity to enjoy its rights and powers as well as incur its liabilities and duties which are different from those enjoyed or incurred by its members.
   
   Case law: T.R. Pratt (Bombay) Ltd. v. E.D. Sasson & Co. Ltd.[1]
   Held: The Hon’ble Bombay High Court held that-“Under the law, an incorporated company is a distinct entity, and although all the shares may be practically controlled by one person, in law, a company is a distinct entity.” Hence, a company has a separate legal existence.
   
2. Perpetual existence:
   The concept of perpetual existence implies that after the incorporation of a company its existence is permanent until it is wound up. Even though the constituting members or directors leave the company, it still continues to exist. The company is identified in a form independent of its members. Since it is distinct from its members, the death, insolvency or retirement of its members doesn’t affect the company.
   
3. Incorporation:
   A company is an association of group of individuals registered or incorporated under the Companies Act. The minimum number of persons required for the incorporation of a Public Company is 7 and in case of a Private Company is 2. Section 3(1) (c) of the Companies Act, 2013 allows the formation of a One Person Company.
   
4. Limited Liability:
   The principal advantage of operating business under the name of a company is limited liability of its members. Since a company is a distinctive entity from its members, it is the owner of its assets and bound by its liabilities. The members of a company are neither the owners of its undertakings nor liable for its debts. The liability of a member extends to the contribution to the capital of the company up to the nominal value of the shares held and not paid by him.[2]
   
5. Artificial person:
   The Company is recognised as an artificial person incorporated and registered under the Company law as it doesn’t have a body of a natural being. Hence, it is dependent upon natural persons namely, the Directors, Officers, Members, Shareholders, etc. to get its work done.
   
6. Common Seal:
   The terms “Common Seal” refers to the official signature of a company. Since a company is an artificial person, it carries out its work through natural persons namely, the Directors and other Officers of the company. It can, however, be bound only by those documents bearing its signature.
   
7. Separate Property:
   A company being a legal person is empowered to buy and dispose of its own property. It is the owner of its assets and is bound by its liabilities.
   
   CASE LAW: Bacha F. Guzdar v. CIT Bombay[3]
   Held: “The Company is a real person in which all its property is vested, and by which it is controlled, managed and disposed of”
   
   CASE LAW: Macaura v. Northern Assurance Co. Ltd.[4]
   Held: “The property of a company is not the property of the shareholders; it is the property of the company.”
   
8. Capacity to sue and can be sued:
   Since a company is a separate legal entity it can sue and can be sued in its own name[5]. A company has the right to protect its name and can file a criminal complaint through its natural persons. It can also sue for defamatory remarks against it which is likely to harm the reputation of its business.
   
   CASE LAW: TVS Employees Federation v. TVS & Sons Ltd.[6]
   It was held that the preparation of a video cassette by the workmen of a company showing their struggle against the company’s management and exhibition could be restrained only on showing that the matter would be defamatory.

Types of Companies

Section 3(1) of the Companies Act, 2013 allows the formation of a company with a lawful purpose, namely a Public company, Private company and One Person Company.

The aforementioned companies formed under section 3(1) may be either-

• A company limited by shares; or
• A company limited by guarantee; or
• An unlimited company.

Meaning of Types of Companies

1. Company limited by shares:
   According to Section 2(22) of the Companies Act, 2013 “company limited by share” means a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them.
   
   A company which issues its shares to public is a company limited by shares where the liability of the shareholders is limited towards the payment of the nominal value of shares held but not paid by them. A company limited by shares should also disclose material events in all its filings before the Stock Exchange and in communications with the shareholders so as to ensure transparency in the dealings.
   
2. Company limited by guarantee:
   According to Section 2(21) of the Companies Act, 2013 “company limited by guarantee” means a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.
   
   This concept also implies that the members are neither the owner of the assets nor bound by the debts of the company. Hence, the members cannot be held liable for the liabilities incurred in the name of the company. Moreover, a company having no share capital is a company limited by guarantee.
   
3. Unlimited company:
   According to Section 2(92) “unlimited company” means a company not having any limit on the liability of its members.

Public Company

According to Section 2(71) of the Companies Act, 2013 “public company” means a company which— (a) is not a private company; (b) has a minimum paid-up share capital of 5 lakh rupees or such higher paid-up capital as may be prescribed: Provided that a company which is a subsidiary of a company, not being a private 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.

Essential Features of a Public Company

• Minimum number of persons required to form a public company is seven.
• In case of a public limited company, the word “Limited” should be sufficed. For example: Reliance Industries Limited.
• Provisions of entrenchment in Articles of Association (AOA) may be alteredeither on the formation of a company or by amendment in the articles agreed to by all the members of the company by a special resolution in the case of a public company -{Section 5(4)}.
  Articles of Association are the regulations for management of the company. Moreover, the term entrenchment has not been defined under the Companies Act, 2013 and therefore its meanings contained in the dictionary are as follows-
  • The process by which ideas become fixed and cannot be changed.
  • basic law or constitution is a provision which makes certain amendments either more difficult or impossible
    
    Hence, it can be depicted that the provisions of entrenchment becomes difficult to change and to follow in the current course of action.
• In case of a public limited company, the liability of the members is limited to the amount invested by them. The shareholders/members are not personally liable for any loss incurred by the company.
• A public company may issue its securities to public through prospectus by complying with the provisions of Part I, Chapter III of the Companies Act, 2013.
• A public company must issue the securities in dematerialised form by complying with the provisions of the Depositories Act, 1996 (22 of 1996) and the regulations made thereunder.
• According to Section 58(2) of the Companies Act, 2013, the securities or other interest of any member in a public company shall be easily transferable provided that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract.
• Section 103(1)(a) of the Companies Act, 2013 provides for quorum for meetings, in case of a public company, five, fifteen or thirty members should be personally present if the number of members as on the date of meeting is less than one thousand, five thousand or more than five thousand respectively.
• Every listed public company must prepare a report of the Annual General Meeting as per the provisions of the Companies Act, 2013 and Rules and file a copy of such report with the Registrar within thirty days of the conclusion of the annual general meeting with such fees as may be prescribed, or with such additional fees as may be prescribed, within the time as specified, under section 403- (Section 121)
• Minimum no. of directors in case of a public company is three and maximum is seven.

Private Company

According to Section 2(68) of the Companies Act, 2013, “private company” means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up 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 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; and (iii) prohibits any invitation to the public to subscribe for any securities of the company.

Essential Features of a Private Company

• Minimum number of persons to form a private company is two or more and maximum number of members is two hundred.
• Provisions of entrenchment in Articles of Association (AOA) may be altered either on the formation of a company or by amendment in the articles agreed to by all the members of the company in case of a private company.
• In case of a private limited company, the words “Private Limited” should be sufficed. For example: ABC Private Limited.
• A private company may issue securities— (a) by way of rights issue or bonus issue in accordance with the provisions of this Act; or (b) through private placement by complying with the provisions of Part II of Chapter III, Companies Act, 2013.
• According to Section 103(1) (b) in the case of a private company, two members personally present, shall be the quorum for a meeting of the company.
• According to Section 149 of the Companies Act, 2013, the minimum number of directors in a private company is two and maximum is fifteen.
• A private company is not required to keep the contract of employment with managing or whole-time directors at its registered office – (Section 190)

One Person Company

According to Section 2(62) of the Companies Act, 2013,”One Person Company” means a company which has only one person as a member. The concept of One Person Company has been newly introduced in the Companies Act, 2013.

Essential Featuers of One Person Company

• Minimum number of person in a One Person Company is one.
• The number of directors in a One Person Company is one and maximum 15.
• One Person Company shall be treated as a Private Company – (Section 3)
• One Person Company provides benefits of both kinds of business- Proprietorship firm and Company.
• The liability of the member of a One Person Company is limited.
• The provisions of the Act which are applicable to a private company shall also be applicable to a One Person Company unless otherwise excluded from the compliance.
• Section 2(68) of the Act provides for the definition of a private company which also includes One Person Company
• The annual return in relation to One Person Company shall be signed by the company secretary, or where there is no company secretary, by the director of the company – (Section 92)

Provisions Regarding Formation of One Person Company {Section 3(1) (c)}

• One person should subscribe his name to the Memorandum along with complying with the requirements of the Companies Act, 2013 in respect of registration.
• In order to be eligible to form and incorporate a One Person Company, the person shall be a Citizen of India and Resident of India.
• The Memorandum shall indicate the name of the other person (nominee) who shall become the member of the company in the event of the subscriber’s death or his incapacity to contract subject to condition that the prior written consent of the other person has been obtained in the prescribed form.
• The written consent of the other person shall be filed with the Registrar at the time of incorporation of the One Person Company along with its memorandum and articles.
• The other person (nominee) may withdraw his consent in such manner as may be prescribed.
• The member of One Person Company may at any time change the name of such other person by giving notice in such manner as may be prescribed
• It shall be the duty of the member of One Person Company to intimate the company the change, if any, by indicating in the Memorandum within such time and manner as may be prescribed and the company shall intimate the Registrar any such change within such time and in such manner as may be prescribed.
• Any such change in the name of the person shall not be deemed to be an alteration of the memorandum.

The Companies Act, 2013 has not only introduced new concepts such as One Person Company but also provides explicit provisions on entrenchment of Articles of Association as well as new compliance requirements for the companies.

[1] AIR 1936 Bom 62

[2] https://www.legalbites.in/introduction-company-law/

[3] (1955)1 SCR 876

[4] (1925) AC 619 HL

[5] Union Bank of India v. Khaders International Constructions Ltd, [1993]2 Comp Lj 89 Ker.

[6] (1996)1 WLR 132 (CA)