CS FINAL COMPANY LAW MEANING & NATURE OF A COMPANY

Transcription

1 CS FINAL COMPANY LAW MEANING & NATURE OF A COMPANY Chapter Meaning: A company may be defined as a voluntary association of persons who have come together for carrying on some business and sharing the profits there from Prof. Haney: A company is an artificial person created by law, having separate entity with perpetual succession and a common seal. Justice James: A company is an association of persons united for a common object. Nature and characteristics: The company is a voluntary association of persons. Separate legal identity. Perpetual succession. Transferability of shares - Freely transferable. Limited Liability of person up to nominal value of shares held by them. Entitled to hold property in its own name. Capacity to sue and be sued. Centralized and democratic governance. Is company a Citizen? Although company is regarded a legal person (though artificial), it is not a Citizen either under the Constitution of India or the Citizenship Act, The Supreme court of India in State Trading corporation of India Vs. C. T. O.(1963) held that a corporation can not have a status of citizen under the Constitution of India. Fundamental rights of shareholders are not lost when they associate to form a company- Bennet Coleman Co. vs. Union of India: Distinction between company and a partnership: Company is a distinct legal person. A partnership is not distinct from the several person who compose it. In case of a company, its property belongs to the Company and not to the individuals comprising it. In a partnership, the property of a firm belongs to the individuals comprising it. Members of the company are not its agents. Partners are the agents of the firm. A partner can not contract with his firm, whereas a member of a company can.

2 Companies shares are ordinarily transferable. Whereas a partner can not transfer his share without the consent of other partner. A company being creature of law can only be dissolved as laid down by law. A partnership firm is the result of agreement and dissolved at any time by agreement. Body corporate It broadly means a corporate entity which has a legal existence. The term "body corporate" is defined in Section 2(11) of the Companies Act, This includes a private company, public company, one personal company, small company, Limited Liability Partnerships, foreign company- body corporate or corporation also includes a company incorporated outside India. However, body corporate does not include (i) a co-operative society registered under any law relating to co-operative societies; and (ii) any other body corporate (not being a company as defined in the Companies Act 2013), which the Central Government may, by notification, specify in this behalf; Supreme Court in Board of Trustees Vs. State of Delhi, A. I. R. 1962; A society registered under the Societies Registration Act does not come within the purview of 'body corporate' ILLEGAL ASSOCIATION [Section 464] Without registration under the companies Act, or any other Indian laws no company, association or partnership that has for its object, the acquisition of gain consisting of more than 50 persons be formed. Consequences of Non-registration: 1. No legal existence. 2. Unlimited personal liability of member. 3. It cannot enter into contract 4. It cannot sue of to be sued by others. 5. It cannot contract debt 6. It cannot be debtor of creditor for any debt.

3 7. However income of the association will be taxable. 8. Fine which may extend upto Rs. 1 Lac per member Exceptionsa. HUF carrying on any business b. Association or partnership, if formed by professionals who are governed by Special Acts. Advantages of incorporation: 1. Corporate Personality: A company has as independent corporate existence; it has a legal personality of its own. It can enter into contracts, open a bank account, can sue and be sued by others; it can own property in its own name. A company is a juristic person independent of its members. Even if a person holds virtually all the shares the rights and obligations of the company shall be different from its members. The company's money and property belong to the company and not to the shareholders. The member's personal property cannot be held liable to pay the creditors of the company. In Saloman Vs. Saloman & Co. Ltd. It was held that company is a different person altogether from its members, It is not possible in case of partnership firm. Salomon was a leather merchant. He converted his business into a ltd. Company Salomon CO. Ltd. The comp. so formed consisted of Salomon, his wife and five children as members. The company purchased the business of Salomon for 39,000 Dollars, the purchase consideration was paid in terms of 10,000 dollars debentures conferring a charge over the companies assets 20,000 dollars in fully paid and 1 dollar share each and the balance in cash. The company within a year ran into difficulties and liquidation proceedings commenced. The assets of the company were not even sufficient to discharge the debentures (held entirely by Salomon). And nothing was left for unsecured creditors. It was held by the House of Lords that the company was validly constituted. The business belonged to the company and not to Salomon. 2. Perpetual succession: An incorporated company has perpetual succession. The life of a company is not related to the life of members. The life of the company is not affected by death or insolvency, retirement or transfer of shares of members. Members may come and members may go, the company continues until is dissolved. 3. Limited liability: The liability of a member shall be limited to the nominal value of the shares held by him. Once he has paid the full amount on the shares held by him, he couldn't be called upon to bear the loss from him personal property. In the case of a company limited by guarantee, the liability of members is limited up to the amount guaranteed by a member. 4. Transferability of Shares: The shares of a company are freely transferable. A shareholder can transfer his shares to any

4 person without the consent of other members. A Company cannot impose any restrictions on the rights of members to transfer their shares. However, the articles shall lay down the procedure of transfer of shares; otherwise it will be governed by table A. 5. Separate Property: Because of its corporate personality, a company can own and transfer property in its own name. Although the shareholders have contributed to the capital of the company, they do not become the part owners of its property. Property of the company should not be treated as member's property or vice versa. In B. F. Guzdar Case the court held that no member can claim himself to be the owner of the company's property during its existence or on its winding up. 6. Capacity to Sue: A company is a juristic person & therefore it can sue in its own name and be sued by others. In Abdul Haq v. Das, it was held that for the recovery of the any amount, the remedy lies against the company and not against the directors or members of the company. 7. Diversity of ownership from management: The company is managed by professional persons and they have the freedom to act in the interest of the company. Disadvantages of Incorporation: Formalities and Expenses Corporate disclosures. Greater social responsibilities. Greater tax burden. Detailed winding up procedure which is expensive and time consuming. Corporate Veil: When a company is formed and registered under the Companies Act, it acquires an independent legal entity distinct from the members. This principle of separate legal entity was established in the Case Saloman Vs. Saloman Co. ltd. Thus, when a company is incorporated all dealings are with the co. and all persons behind the company are disregarded however, important they may be. This means that there is a Veil drawn between the company and its members. Lifting or piercing the corporate veil: The main advantage of forming a company is to have a separate legal entity, the facade of corporate personality might have to be removed to identify the persons who are really guilty. This is known as Lifting Of Corporate Veil.

5 In case of dishonest and fraudulent use of facility of Incorporation, the law lifts the corporate veil and identifies the persons (members) who are behind the scene and are responsible for the perpetration of fraud. It means identification of a company with its members and when this veil is lifted, the individual members may be held liable for its acts wherever necessary for the courts to pierce the corporate veil and look to the person who are in fact the real beneficiaries. The companies Act itself has provided for certain cases making the members or directors personally liable. These are; The Companies Act, 2013 itself contains some provisions [Sections 7(7), 251(1) and 339] which lift the corporate veil to reach the real forces of action. A. Statutory Recognition of Lifting of Corporate Veil Section 7(7) deals with punishment for incorporation of company by furnishing false information; Section 251(1) deals with liability for making fraudulent application for removal of name of company from the register of companies. Section 339 deals with liability for fraudulent conduct of business during the course of winding up. 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. [Inalsa Ltd. v. Union of India, (1996) 87 Com Cases 599 (Delhi).] B. Lifting of Corporate Veil under Judicial Interpretation (1) For determining the character or status of a company: When it is suspected that the company is owned or controlled by enemies of the country, the court may lift the corporate veil and examine the character of persons in the real control of company. [Daimler Co. Ltd. Vs. Continental Tyre & Rubber Co. Ltd.] (2) For the protection of revenue: If a company is used as a means to evade tax, the courts may disregard the corporate veil. In Juggilal Kamlapat Vs. Commissioner of Income Tax, U.P. the Supreme Court held that the court is entitled to lift the mask of corporate entity if it is used for tax evasion or to circumvent tax obligations. In such a case, shareholders may be held liable to pay income tax. (3) For preventing fraud or improper conduct: The court may also lift the corporate veil of a company where it appears that the company was formed only of some fraudulent purpose, to defraud creditors or to avoid legal obligations. In such cash cases shareholders were held to be persons who actually work for the

6 corporation. [Tata Engg. Locomotive Co. Ltd. Vs. State of Bihar] (4) Where the doctrine conflicts with Public policy: Where the corporate veil conflicts with public policy, the court lifts the veil for protecting the public policy. [Connors Ltd. Vs. Connors] (5) Avoidance of welfare legislation:- It is as common as avoidance of taxation and the approach in considering problems arising out of such avoidance has necessarily to be the same and, therefore, where it was found that the sole purpose for the formation of the new 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 v. The Associated Rubber Industries Ltd A.I.R SC 1.) Officer who is in default [Section 2(60)] -means any of the following officers of a company, namely: (i) (ii) (iii) (iv) whole-time director; key managerial personnel; where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified; any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default; (v) any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity; (vi) every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance; (vii) in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer. Relative [Section 2(77)] Sec 2(77) of the Companies Act, 2013 read with Rule 4 of Companies (Specification of definitions details) Rules, 2014 defines RELATIVE. A person is deemed to be a relative of another if (a) They are members of a Hindu Undivided Family (HUF); (b) They are husband and wife; or (c) The one is related to the other in the manner indicated as-

7 Father (Provided that the term Father includes step-father) Mother (Provided that the term Mother includes the step-mother) Son (Provided that the term Son includes the step-son) Son s wife. Daughter. Daughter s husband. Brother (Provided that the term Brother includes the step-brother) Sister (Provided that the term Sister includes the step-sister) SIDDHARTH ACADEMY

8 Chapter:TYPES OF COMPANIES CLASSIFICATION OF COMPANIES Concept of ONE PERSON COMPANY 1) What is OPC? A One Person Company (OPC) is a hybrid structure, wherein it combines most of the benefits of a sole proprietorship and a company form of business. It has only one person as a member who will act in the capacity of a director as well as a shareholder. Section 2(62) defines One Person Company as a company which has only one person as a member. 2) What will be the form of One Person Company?

9 One Person Company will be formed as a Private Limited Company. It can be formed as company limited by share capital or limited by guarantee or unlimited company. The words One Person Company will have to be mentioned in brackets below the name of such company, wherever its name is printed, engraved or affixed. 3) What is the minimum authorized capital for starting up a One Person Company? The process of starting a One Person Company is the same as that of a general private limited company. Hence, the minimum paid-up and subscribed capital of teh One Person Company would be Rs. 1, 00,000. 4) What is the minimum number of directors and shareholders to form a One Person Company? An One Person Company can be started with one director and shareholder only. 5) Who is a nominee in a One Person Company? A nominee is a person who in the event of death or disability of the subscriber of the One Person Company shall assume his position. Memorandum of Association of a One Person Company will prescribe the name of the person. 6) Can a nominee of a One Person Company be changed after incorporating the company? Yes. A nominee can be changed at any time with due intimation to the Registrar. 7) How many One Person Companies can be formed by one individual? One individual can form only one One Person Company. 8) Can a foreign national form One Person Company? No. Only an Indian citizen and resident can form One Person Company. 9) Does a nominee of a One Person Company need to acquire a DIN number as well? No. Nominee is only required to hold a valid PAN in his/her name. 10) Who can be appointed as a nominee for a One Person Company? For the purpose of starting up a One Person Company, only an individual (natural person) who is an Indian Resident and citizen can be appointed as a nominee for the sole member of One Person Company. 11) Who is considered as resident for the purpose of forming an One Person Company or being appointed as a nominee? For the purposes of this rule, the term resident in India means a person who has stayed in India for a period of not less than one hundred and eighty two days during the immediately preceding one calendar year. 12) In how many One Person Companies can a person become a nominee? A person can become a nominee in not more than 1 One Person Company. 13) Can a One Person Company be converted into a Section 8 company or any other company?

10 No. One Person Company cannot be converted into a Section 8 company. Further, One Person Company cannot be voluntarily converted into any other kind of company until the cooling period of 2 years is completed from the date of incorporation. 14) Who all are disqualified to form One Person Company? Following persona are disqualified to form an One Person Company: A minor. A foreign citizen. Non-Resident. A person incapacitate to contract. Any other person apart from living person. 15) Can a One Person Company engage in any form of business activities? An One Person Company can engage in any sort of business activities apart from Non Banking Financial Investment Activities including investment in securities of body corporates. 16) What is the process of appointing a nominee for the One Person Company? The name of the nominee should be included in the Memorandum of Association of the One Person Company. The sole member of the One Person Company will have to obtain a written consent from the nominee in Form INC. 3. This Form has to be submitted to the ROC alongwith Form INC.2 during its incorporation. 17) What will happen in case of death of the sole member of the One Person Company? In case the sole member of the One Person Company dies or is incapacitate by any disability, the nominee will assume the position of the member. Within 15 days of becoming the member, he will have to appoint a nominee for the One Person Company and intimate the ROC in Form INC.4 (alongwith Form INC. 3) within 30days of change in membership. 18) Is a One Person Company required to hold a Board Meeting? A One Person Company is required to hold a Board Meeting, if the number of directors is more than one. It will be deemed to have complied with the provisions relating to Board Meetings, if at least one meeting is conducted in each half of the calendar year. However, the gap between the two meetings should not be less than ninety (90) days. 19) Is a One Person Company required to file its Annual return? Yes. The annual return of the One Person Company has to be signed by the sole member of the One Person Company. 20) Is One Person Company required to hold an AGM? Provisions of Annual General Meeting (AGM) and Extra-Ordinary General Meetings do not apply to a One Person Company. 21) When will a company cease to operate as an One Person Company? An One Person Company will cease to operate as an OPC where the paid up capital of an One Person Company exceeds Rs.50 lacs or its average annual turnover during the relevant period exceeds Rs.2 Crores, it shall cease to continue as a One Person Company.

11 22) Can a private company convert itself into a One Person Company? A private company can convert itself into a One Person Company provided it satisfies the following conditions: It must have a paid up capital of Rs. Fifty Lakhs or less; or It must have its average annual turnover of Rs. 2 crores or less. 23) How can a private limited company be converted into a One Person Company? A private limited company has to obtain a No Objection in writing from members and creditors prior to its conversion. Post obtaining the same, it will have to pass a Special Resolution in the General Meeting. The One Person Company shall file file copy of the Special Resolution with the Registrar within thirty days from the date of passing such resolution in Form No. MGT 14. The company shall file an application in Form No. INC. 6 for its conversion into One person Company Q1. Define PRIVATE COMPANY Section 2 (68) of the Act defines a private company. The number of members required to form a private company are two. The maximum number of members a private company may have is two hundred. The restrictions to be contained in the articles are: i.-the right to transfer its shares; ii.-except in case of a One Person Company, the maximum number of members would be two hundred; (joint-holders to be treated as a single member and employees including ex-employees excluded for the number of members) iii.-prohibition to invite the public to subscribe for any securities of the company. Q2. Comment on Commencement of business by a Company As per section 11 a company having a share capital shall not commence business or exercise borrowing powers unless a declaration is filed by a director within 180 days of the date of incorporation confirming payment of minimum paid-up share capital by subscribers and the company has filed with the Registrar a verification of its registered office within 30 days of incorporation. Q3. Define Key Managerial Personnel Every listed company and every other company having paid-up share capital of Rs. 5 crore or more is required to appoint key managerial personnel as stated in section 203.

12 Key managerial personnel as stated in section 203 are : 1.-Managing director or Chief Executive officer or manager and in their absence, a whole Time director; 2.-Company secretary and 3.-Chief Financial Officer.

13 Q4. What is Small Company? Small Company: means a company other than a public company having paid up share capital not exceeding INR 50,00,000 (or such higher amount as may be prescribed which shall not be more than INR 5,00,00,000) or turnover of which as per its last profit and loss account does not exceed INR 2,00,00,000 (or such higher amount as may be prescribed which shall not be more than INR 20,00,00,000). However, this section of small company will not be applicable to (a) Holding or subsidiary company; (b) Company registered under Section 8 of 2013 Act ; or (c) Company or a body corporate formed under the special act. [Section 2(85)] Q5. What is an Associate Company? Associate Company means a company which has Significant Influence over the other company and which is not a subsidiary company but includes a joint venture company. Further it has been explained that Significant Influence shall mean control of at least having 20% of total share capital or control of the business decision under an agreement. [Section 2(6)] Q.6 what is Dormant Company? Where a Company is formed and registered under 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 RoC for obtaining the status of a Dormant Company. Inactive Company is one which has not been carrying on any business or operation, or has not made any significant accounting transaction, or has not filed financial statements and annual returns for the last two financial years. (S. 455)