Types of Companies
by Asok Nadhani,
2.1 Classification of
Companies
Companies may be classified
into various kinds on the following basis of:
-
Incorporation
-
Liability
-
Size
-
Control
-
Ownership
-
Place of Incorporation
2.2
Classification of company as per Incorporation
a.
Companies may primarily
be classified as:
Incorporated
Unincorporated
b.
Incorporated Companies can be further classified
into:
-
Statutory Company
-
Registered Company
-
Chartered Company
2.2.1 Statutory
Company
a.
Such companies (or
corporation) are ‘Body Corporate’ and are enacted under the authority
of a statue, by a special Act of the Parliament or State Legislature (e.g
Reserve Bank of India, State Bank of India, Life Insurance Corporation,
Industrial Finance Corporation, Unit Trust of India).
b.
Characteristics of a Statutory Company (or
corporation)
i.
It is strictly not a company. However, the
provisions of the Companies Act, 1956, so far as not inconsistent with the
provisions contained in the statute applicable to such corporation, also apply
to it.
ii.
It is not a government company. A company
registered under Companies Act only can become a government company.
2.2.2 Registered Company
These are companies formed
and registered under the Companies Act. Most of the Companies fall into this
category.
a.
Such
company
may be formed and registered under the Companies Act, 1956 by complying with
the formalities of incorporation.
b.
The whole of the Companies Act, 1956 shall apply to
a registered company.
2.2.3 Chartered
Company
These companies
came into existence by a charter (order) of the Queen of England (e.g: East
India Company) and are no longer in existence.
2.3
Classification of Company as per Liability
On the basis of liability
companies can be classified into:
- Company with
Limited Liability
- Company with
unlimited Liability [Sec. 12 (2) (c)]
2.3.1 Companies
with limited liability
Companies formed with
limited liability, may be categorised as :
-
Limited by Shares
-
Limited by Guarantee
-
Limited by Guarantee having no share capital
-
Limited by Guarantee having a share capital
2.3.1.1 Companies limited
by shares: [Sec.
12(2)(a)]
i.
Such companies must have share capital and the
liability of the members of a company is limited to the amount unpaid on the
shares (so liability for fully paid shares is nil).
ii.
Such liability may be enforced during the existence
or during winding up of the company.
iii.
A company limited by shares may be a Public
company or a Private company. Ex.2.1
2.3.1.2 Companies limited
by guarantee: [Sec. 12(2)(b), 37]
a.
Such companies are normally formed for promotion of
art, science, culture, charity, sports, commerce (normally not for the purpose
of profit).
b.
Such Companies may or may not have share capital.
c.
The liability of the members of such company is
limited to:
i.
Without Share Capital : Limited to
amount guaranteed in Memorandum (at the event of the company being wound up).
ii.
With Share Capital : Limited to
aggregate of guaranteed amount in the Memorandum and unpaid on Shares.
iii.
For a company limited by
guarantee, any provision to divide the undertaking of the company into shares or interests, shall be treated as a
provision for a share capital, even if nominal amount or number of the shares
or interests is not specified thereby (s.37).
iv.
In the case of a company
limited by guarantee and not having a share capital, any provision to give any
person a right to participate in the divisible profits of the company otherwise
than as a member shall be void (s.37).
2.3.1.3 Limited
Liability of Member rendered Unlimited:
i.
In the following case, the limited liability of a
member becomes unlimited:
a.
Reduction in minimum
number of Members [Sec.45]: Where the number of members
in a Public Company falls below 7 (2 in case of Private Co.) and the business
is carried on for more than 6 months with such reduced membership, every member
who is aware of this fact, shall be severally liable for the whole of the
Company’s debts incurred after the expiry of said 6 months.
b.
Fraudulent Conduct of
Business [Sec.542]: Where in the course of winding up, it appears that
any business of Company has been carried on with an intent to defraud Creditors
or any other person, or for any fraudulent purpose, persons who were knowingly
parties to the transaction can be made personally liable without limitation of
liability for debts and liabilities of the Company.
ii.
Personal Liability: Where the person’s
liability is already unlimited, he cannot be made personally liable for the
debts of the Company. [Kuriakose vs. P.K.V. Group Industries]
2.3.1.4 Similarities between
Guarantee Company & Company having Share Capital
i.
Similarities
-
They have separate legal
personality and
-
Limited liability.
ii.
Distinction between a Guarantee Company and a
Company having Share Capital
|
Basis
|
Guarantee
Company
|
Company having
Share Capital
|
|
Liability of Members
|
Limited by the amount guaranteed
by members to pay in the event of winding up.
|
Limited to the unpaid amount on the
shares held by them.
|
|
Share capital
|
It may or may not have a
share capital.
|
It must have a share capital.
|
|
Enforceability of liability
|
Liability arises only at
the time of winding up of the company.
|
It arises when a valid
call is made by the company.
|
|
Number of Members in Articles
|
Must mention the maximum
number of members in the Articles.
|
It does not have to
specify the maximum number of members in the Articles.
|
|
Requirement of own
articles
|
A company limited by
guarantee, must have its own articles.
|
A public company limited
by shares may not have its own articles.
|
|
Minimum paid up capital
|
It does not require to
have a minimum paid up capital.
|
Company limited by shares
(other than those licensed u/s 25) must have a minimum paid up capital.
|
2.3.2 Unlimited Companies
i. A company
without limited liability is known as ‘Unlimited Company’. In such a company,
every member is liable in proportion to his interest in the company (like
normal partnership firms)
ii. Such Company may
or may not have Share Capital. Unlimited Companies having Share Capital must
have its own Articles of Association (it may be a Public Company or a Private
Company).
iii. Form of
Memorandum and Articles of Association has been prescribed in Table E of
Schedule I.
2.3.2.1 Features
of Unlimited Companies (Sec. 98)
a. It must have its
own Articles of Association.
b.
The Articles must state the number of members with
which the Company is to be registered.
c.
If the Company has share capital, the Articles must
also state the amount of share capital with which the company is to be
registered.
d.
i. As
long the Company is a going concern, the liability on the shares can only be
enforced by
the Company on the members, but the
liability of its members is unlimited in respect of
creditors.
ii. In case of
winding up, if the property of the company is not sufficient to pay all the
debts of the company, then the members are liable to pay such deficiency in the
ratio of their respective interests. However, if any member becomes insolvent,
his deficiency shall be shared by remaining members in their respective
interests.
e. If the unlimited
Company has share capital, it may increase the nominal value of its shares if:
i. No part of such
increase shall be called up except on winding up, or
ii. A specified
portion of its uncalled share capital shall not be called up except on winding
up.
2.3.2.2 Registration of unlimited company as limited (Sec.
32)
a.
A company registered as
unlimited may register under this Act as a limited company;
b.
A company already registered
as a limited company may re-register under this Act.
c.
On registration in pursuance
of this section, the Registrar shall close the former registration of the
company, but the registration shall take place in the same manner and shall
have effect, as if it were the first registration of the company under this
Act.
d.
The registration of an
unlimited company as a limited company under this section shall not affect any
debts, liabilities, obligations or contracts entered before the registration,
and may be enforced in the manner provided for Part IX of this Act
(Amalgamation, Merger & Division).
e.
Options at the time of conversion. As per
s.98, an unlimited company, at the time of conversion into a limited company,
may opt for:
i. It may increase the nominal value of its shares subject to the condition
that increased amount of nominal value cannot be called except on winding up of
the company.
ii. Resolve that a part of its uncalled share capital shall not be called except
on winding up.
2.3.2.3 Unlimited Co. Vs. Partnership
a.
Similarities
All the partners are liable for payment of all the debts of the firm.
All the members of an unlimited company are liable for payment of all the debts
of the company.
b.
Differences
-
A partnership firm does not have separate legal
entity without its partners. But an unlimited company is a distinct person from
its members.
-
The partners are jointly and severally liable for
payment of all the debts of the firm. Therefore, the creditors can directly sue
the partners of a firm.
-
A member of a company is liable to pay the money
due from him to the company only and not to the creditor of the company.
Therefore, no creditor can directly sue a member. The creditor can sue the
company for recovery of money and the company can in turn sue the members for
such recovery of money.
2.4
Classification as per Size
On the basis of
number of members, a company can be further classified into
-
Private Company
-
Public Company
2.4.1 Private Company
i.
A 'private company' must provide in its own
Articles, by which it: [s. 3(1) (iii)]
- restricts the right
to transfer its shares, (but cannot prohibit Transfer of Shares).
- limits the number
of its members to fifty (not including its employee members, present or
past, joint holders considered as single member). [Iee vs. Lee's Air Farming
Limited ]
- prohibits
invitation to public to subscribe its shares or debentures.
- prohibits
invitation or acceptance of deposits from persons other than its members,
directors or their relatives.
ii.
A Private Company should
have minimum paid up capital of Rs 1 lac. (s.3(3))
iii.
Additional certificate
with annual return
The annual
return filed by an private company must be accompanied by a certificate stating
that the company has not made any invitation to the public for subscription of
its shares or debentures, and that the members of the private company have not
exceeded 50 as per the provisions of section 3(1) (iii) (s. 161).
iv.
Consequences of infringement of Articles by private
companies: (Sec.43)
a.
On infringement of restrictions as provided u/s
3(1)(iii), the Company ceases to be a private Company.
i.
The Act will apply as if it were not a private
Company.
ii.
If infringement were accidental, the central
government may relieve the Company on certain terms and conditions. (Provision
to s.43)
b.
Consequences of reduction of members:
i.
Several
liability of members (s. 45): If the number of members falls below 2 and
the Company carries on business for 6 months from the date of such reduction,
liability of members will become unlimited.
ii.
Company winding
up (s. 433(d)): Reduction in membership below 2 is a ground for
compulsory winding up.
iii.
Contributory
Petition (s. 439): Contributory may present petition for winding up
if number of members falls below 2.
2.4.1.1 Advantages & Special
Privileges of a Private Company
A private company enjoys
some special privileges compared to a public company, like :
a.
No. of members: A private
company can start with only two members.(s.12)
b.
Minimum subscription: A private
company can allot shares even before the minimum subscription is received.
c.
Prospectus: A private
company may allot shares without issuing a prospectus or filing a statement in
lieu of prospectus. (s.70(3))
d.
Kinds of share capital: A private
company may issue share capital of any kind as it likes, whereas a public
company can issue only equity and preference shares.
e.
Commence business: A private
company can commence business immediately on
incorporation.(s.149)
f.
Index of members: A private
company may not maintain an index of members.(s.151)
g.
Statutory
Meeting: A Private Company need not hold statutory meeting nor file the
statutory report with the Registrar.(s.165)
h.
Managerial remuneration: There is no
restriction regarding maximum managerial remuneration as it applies to a Public
company.
i.
Directors: The rules regarding
appointment of directors are not so rigorous as compared to the public company.
A private company need not have more than 2 directors. (s.252)
j.
Minimum capital: Minimum capital
contribution required in the case of private co. is only Rs.1,00,000. (s.3(3))
k.
Increase of directors: Permission is not
required for increasing directorship.
l.
Qualification shares: Directors are
not required to take qualification shares.
m.
Further issue of
capital: In case of further issue of capital, the shares need not be first
offered to the existing shareholders.
n.
Quorum: Only 2 persons
are required quorum for general meeting. (s.174)
o.
Notice: A private
company may call and hold its general meeting by giving a notice shorter than
21 clear days.
p.
Managerial remuneration: A private
company may remunerate the Managerial Personnel by a profit percentage which
can be more than 11% u/s 198.
q.
Rotational retirement: Rotational
retirement of directors is not applicable to private companies. (s.255)
r.
Directors to
file consent: Directors are not required to file their consent to act as directors
with the registrar u/s 264.
s.
Appointment of
whole time director: Approval of Central Government is not required for
appointment of a Whole Time Director or Managing Director. (s.268, 269)
t.
Ceiling: No restriction
applies on directors, regarding the no. of companies in which one can be appointed
as directors. (s.275, 279)
u.
Loan to
director: Prior approval of Central Government for Loan to director not needed.
(s.295)
v.
Net profit: A private
company is free to make its own provision in respect of method of determining
net profit for remuneration to Manager/Director.
w.
Inter company investment: The provisions
of Sec. 372(A) in respect to inter company investment do not apply to private
companies.
x.
Change in body
of directors: The company Law Board cannot prevent change in Board of Directors.
y.
Demand for poll (Sec.179): In case of a
private company, poll can be demanded by 2 members (1 member, in case not more
than 7 members are present) in general meeting (there are stricter requirements
for demanding poll in case of a public company).
z.
No disclosure of Profit and loss account to the
public: A private company may file the
copies or balance sheet and profit and loss account separately with the
Registrar (s.220) and the Registrar shall not allow inspection of profit and
loss account to any person other than a member.
za.
No right of a person to stand for directorship: Any person (whether a member or not) can give
a notice to a public company to stand for directorship, and the company cannot
refuse to act on such notice (s.257), but a private company may refuse to elect
a person as a director, if such person is not considered as a fit person. (s.257)
zb.
Power to add grounds of disqualifications and
vacation of office: A private company may, by its articles, add any
ground on which a person shall be disqualified to become a director (s.274) or
vacate the office of a director (s.283).
zc.
No limit on borrowings: Section 293
regarding consent of members for borrowing does not apply to a private company,
for borrowings exceeding aggregate of paid up capital and free reserves.
zd.
No prohibition on voting by an interested director:
In
case of private company, even an interested director can participate in discussion,
can be counted in quorum, and can vote on a contract or arrangement in which he
is interested. (s.300)
ze.
No approval for appointing a managing director,
whole time director or manager: Appointment of a managing director, whole
time director or manager can be made in a private company without obtaining
approval of Central Government or complying with the requirements of Schedule
XIII. (s.269)
zf.
Any kind of share capital: A private
company may also issue any kind of share (other than Preference & Equity)
e.g., founder shares or deferred shares.
zg.
Financial assistance for purchase of own shares: A private
company may give financial assistance to any person for purchase of its own
shares. (s.77)
zh.
No undertaking to take qualification shares: In a private
company, a person named as a director in the articles, is not required to file
an undertaking to take and pay for qualification shares. (s.266)
zi.
No restriction on appointment of firm or body
corporate: A private company can appoint any firm or body corporate at any office
or place of profit for any period, even for a period exceeding 5 years. (s.204)
zj.
No power of Company Law Board to prevent change in
composition of Board: Section 409
regarding change in composition of Board does not apply to a private company.
2.4.1.2
Disadvantages of a Private Company
The
disadvantages of a private company are listed below:
a.
Restriction on maximum number of members : A private
company can have a maximum of 50 members. Thus, a private company cannot have
as large membership base as a public company can have.
b.
Restriction on transferability of shares : A private company has to impose restrictions
on free transferability of shares.
c.
Restriction on issue of shares and debentures to
public : A private company cannot issue shares and debentures to the public, and
so cannot raise large finance as compared to public companies.
d.
Restriction on acceptance of public deposits : A private
company can accept deposits only from its shareholders, directors and their Relatives,
but cannot accept any public deposits.
e.
Prohibition
on issue of share warrants : A private company cannot issue share warrants.
f.
Appointment of one proxy by members : A member of a
private company cannot appoint more than one proxy for a general meeting
(Section 176).
g.
Annual return must be accompanied by a additional
certificate : As per section 161, the annual
return filed by a private company must be accompanied by a certificate stating
that the company has not made any invitation to the public for subscription of its shares or debentures, and that the members
of the private company have not exceeded 50 as per the provisions of section
3(1)(iii).
h.
No power of the Board to fill casual vacancies : In case of
private company, any casual vacancy arising in the office of a director cannot
be filled by the Board of directors (can be filled by the shareholders in
general meeting only) unless the articles of the private company authorized the
filing of casual vacancies by the Board.
i.
Own articles : A private company must make its own articles.
2.4.1.3
Restriction on transfer of Shares of Private Company
The Articles of Association of a Private Company may contain the following
provisions for restriction on transfer of shares:
a.
Transfer of shares shall
not be valid unless approved by the Board of Director (BoD) of the company.
b.
Shares can be transferred
among the members of the company at a price approved
by the BoD, but such transfer can be restricted to any person who, in the
opinion of the BoD, is not suitable for the membership of the company.
c. To transfer share, a member has to submit the complete transfer deed
along with the shares certificate to the BoD.
d. The directors have the ultimate authority to approve or disapprove such
transfer of shares in the interest of the company.
2.4.1.4 Change of name of existing Private Limited Companies (Sec. 24)
In the case of a company which was a private limited company immediately
before the commencement of this Act, the word "Private" before the
word "Limited" in the name of the company shall be inserted by
Registrar and necessary alterations be effected in the certificate of
incorporation and memorandum of association.
2.4.2 Public company [Sec.
3(1)(iv)]
i. A Public company
means a company which is not a Private Co. and has a minimum paid-up capital of
Rs. 5 lakh (or higher as prescribed by its Articles), or a Private Company
which is a subsidiary of a company which is not a private company.
ii. A Public company
may not impose the restrictions on invitation to public for issue of shares,
debentures or deposits and number of members.
2.4.3 Distinction between
Private and Public Company
|
Basis
|
Private Company
|
Public Company
|
|
Minimum Paid up Capital
(S.3)
|
Rs.1,00,000
|
Rs.5,00,000
|
|
Minimum number of members
to form the Company [S. 12(1)]
|
2
|
7
|
|
Maximum number of
members
[S. 12(1)]
|
50
|
No restrictions
|
|
Minimum Number of
Directors
[S. 252(1)]
|
2
|
3
|
|
i.
Appointment of Directors [S. 263]
|
Each director must be appointed by a
separate resolution.
|
All directors may be
appointed by a single resolution.
|
|
Subscription for
shares or Debentures [S. 3(1)]
|
Articles of Association must prohibit
invitation to the public.
|
General public may be
invited to subscribe shares or debentures.
|
|
Transferability of
shares/debentures
|
Right to transfer shares and debentures is
restricted by the Articles.
|
Shares and debentures are
freely transferable (Sec. 82).
|
|
Minimum Quorum [S. 174(1)]
|
2
|
5
|
|
Maximum Managerial
remuneration
(S. 198)
|
No restriction as such.
|
11 per cent of net profits
|
|
Commencement
of Business
[S. 149]
|
After receiving the certificate of
incorporation.
|
After receiving the
certificate of
commencement of business.
|
|
Maximum no. of directors [S.259]
|
No such restriction.
|
Twelve (approval of
Central Government is necessary for more)
|
|
Appointment
of small shareholders Director [S. 252(1)]
|
Not applicable.
|
Applicable if the
company’s paid-up capital is Rs.5 crore or more and one thousand or more small
shareholders.
|
|
Appointment
of casual directors
|
Not applicable.
|
Applicable, subject
to regulation in the articles .
|
|
Issue of share warrants [S. 114(1)]
|
Cannot issue Share Warrants.
|
Can issue (for fully paid
shares) subject to authorization in the articles, on approval of Central
Government.
|
|
Further
issue of capital [S. 81]
|
No compulsion to issue shares to existing
shareholders.
|
Applicable, subject to
certain exceptions.
|
|
Audit
Committee [S. 292A]
|
No need to constitute Audit Committee.
|
Applicable to every public
company whose paid-up capital is Rs.five crores or more.
|
|
Statutory
Meeting [S. 165]
|
Need not hold statutory meeting.
|
Shall hold within one
months from the date entitled to commence business.
|
|
Appointment
of proxy [S. 176(1)]
|
Not entitled to accept more than one proxy
for each member.
|
No restriction.
|
|
Acceptance
of Public Deposits
|
Deposits cannot be accepted except from its
Members, Directors and their relatives.
|
Free to accept deposits
from the public subject to provisions of s.58.
|
|
Prospectus
|
Prospectus cannot be issued.
|
Issued to invite the
general public to subscribe for its Shares, Debentures and Deposits.
|
|
Statement
in lieu of Prospectus
[S.
70]
|
No need to file Statement in lieu of
Prospectus.
|
To be filed with the ROC
at least 3 days before allotment, when prospectus is not issued.
|
|
Director’s
Consent etc.
[S.
264 & 266]
|
No need to file the Directors written consent
with the ROC.
|
Directors shall file their
written consent with the ROC to act as Directors, must sign Memorandum for
Shares taken and agree to take up their qualification shares, if any.
|
|
Rotational Retirement of
Director [S. 256]
|
Rotational retirement of Directors is not
needed.
|
At least 2/3rd
of Directors shall retire by rotation at each AGM.
|
2.4.4 Conversion
of Companies
A Private
Company may get converted to Public and vice versa in following ways:
-
Automatic conversion on violation of rules (S. 43)
-
Conversion by its own choice or volition (S. 44)
2.4.4.1 Conversion
of Private Company into Public Company
i.
Conversion by
choice or volition (sec. 44)
a.
If any private company alters its Articles of
Association in such a way that it does not contain the essential provisions to
make it a private company, the company shall cease to be a private company. In
such circumstances, it has to file with the Registrar, within 30 days, either a
prospectus or a statement in lieu of prospectus.
b.
Consequently, the company becomes a public company
and shall :
-
file a copy of the resolution altering the Articles
-
raise the number of members to 7 and directors to
more than 2
-
change or alter the regulations which are
inconsistent with those of a public company.
If a private company is converted into a public company within 6 months
of its incorporation, it should hold statutory meeting as per the provisions of
section 165.
·
Surrender the original certificate of incorporation
and obtain a fresh certificate of incorporation.
·
Issue a general notice in the newspaper stating the
fact of conversion.
·
Obtain a new common seal.
ii.
Conversion on
violation of rules (sec. 43)
When a private company
makes default in complying with the essential requirements of a private
company, like:
-
restriction on transfer of shares
-
limitation of the number of members to 50
-
prohibition of invitation to the public to buy
shares or debentures.
iii.
Restoration of privileges: Company Law
Board may restore the privileges (i.e., relieve the company from the consequences
of default) if it is satisfied that:
-
failure to comply with the conditions was
accidental or due to inadvertence or due to some other sufficient cause; or any
-
just and equitable ground to grant relief.
iv.
Alteration of Articles:
a.
The company shall alter its articles (by passing a
special resolution) so that the articles no longer include the restrictive
provisions of Section 3(1) (iii).
b.
The company shall also change its name by deleting
the word ‘Private’ from its name (by passing a special resolution) and make
necessary alteration in AoA & MoA..
v.
Filing of
Documents: The company shall within 30 days of alteration of articles, file with
the Registrar:
·
A prospectus (as per Schedule II) or a statement in
lieu of prospectus (as per Schedule IV).
·
A copy of special resolution passed by the company
for effecting alteration of articles.
·
A copy of amended articles and memorandum.
2.4.4.2 Conversion of
Public Company into Private Company
i.
A special resolution has to be passed to change the
Articles of the company so as to include the conditions as prescribed in Sec. 3
(1) (iii), to make a company a Private Company. It shall obtain approval
of Central Govt. within 3 months of passing of special resolution.
ii.
The alteration of the Articles will come into
effect after the approval of the Central Government. [S.31(1)]
iii.
Within 1 month of the date of receipt of approval,
a printed copy of the altered Articles has to be filed with the Registrar. [S.
31(2A)]
2.4.5 Deemed
Company
i.
A private company becomes a deemed public company
by operation of law, under circumstances specified u/s 43A.
ii.
Section 43A has been made non-operational by the
Companies (Amendment Act, 2000, i.e., 13.12.2000. So, no company shall become a
deemed public company on or after 13.12.2000.
iii.
Conversion of deemed Public Company to Private
Company : A deemed public company
existing on 13.12.2000 can become a private company as follows:
a.
It shall inform the Registered that it has become a
private company.
b.
The Registrar shall, within 4 weeks of receipt of
intimation:
i.
Include the words ‘private’ in the name of the
company.
ii.
Make the necessary alterations in the certificate
of incorporation, Memorandum of association & Articles or Association.
2.5
Classification as per Control
On the basis of
control, companies may be classified into:
-
Holding company
-
Subsidiary company
2.5.1 Holding
Company [Sec. 4 (4)]
A Holding
Company is a company which has control over another company (called subsidiary
company). As per s.4 (4), a company is deemed to be the holding company of another
if that other is its subsidiary. [Fereewheel
(India
2.5.2 Subsidiary
company [Sec. 4 (1)]
When a holding company (Company H) exercises
control over another company (Company S), the company S becomes the Subsidiary
company of the holding company H, in any of the following 3 ways: [Fereewheel (India) Ltd VS. Dr. Veda
Mitra]
a.
By controlling the composition of Board of
directors : Where a company (Company H) controls the composition of board of
directors of another company (Company S), the Company S shall become the subsidiary of the company H. In such a case,
Company H can appoint or remove all or a majority of directors of
Company S.
b.
By Holding of majority
of shares : When Company H holds more than half in nominal value of equity share capital
(i.e, Face Value of equity capital subscribed) of Company S, then Company S
becomes the subsidiary of Company H (Company H becomes Holding Company).
c.
By becoming subsidiary
of another subsidiary company : Where a company
is subsidiary of another company which is itself subsidiary of the controlling
company, the former subsidiary Company becomes the subsidiary of the
controlling company. Ex.2.2
2.6 Classification
as per Ownership
On the basis of ownership,
a company may be a -
-
Government company
-
Non-Government company
2.6.1 Government Company
i.
A Government company means any company in which not
less than 51 per cent of the paid-up share capital is held by :
-
Central Government
-
State Government or Governments, or
-
Jointly by Central and one or more State
Governments.
ii.
The subsidiary of a Government company is also a
Government company (Sec. 617).
iii.
The whole of the Companies Act, 1956 applies to the
government companies as it applies to any other company, unless any exemption
has been specifically granted to a Government company under section 620 (by
issue of a notification by Central Government).
iv.
Where the total shareholding of the company, is
held by the government, compliance of certain statutory provisions are exempted
like:
- There need
not be any statutory meeting and statutory report as prescribed in Section
165 of the Companies Act.
- There is no
overall maximum managerial remuneration with or without a correlation with
the profits.
- Unpaid
dividend need not be transferred to a special dividend account as
specified in Section 205A.
- Public
Sector companies are not regulated by Section 370 in respect of loans to
companies in same management.
v. Though certain
privileges are granted to Government Companies, there are stringent rules relating
to appointment of auditor and audit of accounts of these companies.
2.6.2 Public Financial
Institutions (Sec. 4A)
i.
The following companies are
regarded as Public Financial Institutions u/s 4A of Companies Act, 1956:
a.
ICICI Ltd., IFCI, IDBI,
LIC, UTI.
b.
The Infrastructural
Development Finance Company Limited.
c.
The Securitisation
Company or reconstruction company which has obtained certificate of
registration of the securities and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002.
d.
Any other institution
specified by the Central Government whose 51% or more of the paid up share
capital is held or controlled by the Central Government.
ii.
The Public
financial institutions like ICICI, LIC, UTI and IDBI are empowered to appoint nominee
directors on the Board of a company even where the Articles of Association of
such lendee company do not provide for the same. The nominee directors so
appointed will not form part of the maximum number of directors and not
required to retire by rotation.
2.7 Classification
as per place of incorporation
On the basis of place of
incorporation, a company may be a -
-
Indian company
-
Foreign company
2.7.1 Indian Company
It means any company
incorporated in India
2.7.2 Foreign Company
a.
Definition
i.
It means any company incorporated outside India India
ii.
If a company incorporated outside India India
iii.
Likewise, a company that is incorporated in India
b.
Rules applicable to Foreign Company
If 50 per cent or more of the paid-up share capital
of a foreign company is held (singly or jointly) by one or more citizens of India India
c.
Use of official
seal outside India
i. A company doing business outside India may, if authorised by its articles,
use facsimile of the common seal of the company as official seal outside India
with the addition on its face of the name of the territory, district or place
where used.
ii. A deed or other document to which such an official seal is duly affixed
shall bind the company as if it had been sealed with the common seal of the
company.
d.
Subsidiary or Holding Company of Foreign Body Corporate
i.
A Subsidiary of Holding Company of a Body Corporate
which is incorporated outside India, shall be deemed to be a Subsidiary or
Holding Company of that Body Corporate under that foreign law for the purpose
of Companies Act, whether the requirements of Sec.4 are fulfilled or not. [Sec.4(6)]
ii.
A private Company, a Subsidiary of a Foreign Body
Corporate, which, if incorporated in India India
2.8 Association not for Profit (Sec. 25)
i.
Definition
A non profit
companies or associations with limited liability may be permitted by Central
Government to use name without the words “limited” or “Private limited” (sec.
25), if following conditions are fulfilled [Sec. 25(1)]:
- The company
shall be established for promoting commerce,
science, religion, charity or any other useful object.
- Any profit
incurred by the company shall be utilized for the promotion of the object
of the company, and shall not pay any dividend to its members.
ii.
Features
a.
On registration, the company shall include the
license in its Articles or in Memorandum. [Sec. 25(2)]
b.
The Company cannot alter its objects clause in the
Memorandum of Association without the approval of the Central Government. [Sec.
25 (8) (a)]
c.
The Company enjoys all the privileges of a Limited
Company, and is subject to all its obligations, except those in respect of
which exemption by a special or general order is granted by the Central
Government.
d.
The Company need not pay stamp duty for registering
their Memorandum and Articles of Association.
e.
The Company is exempted from the requirement of
having a minimum paid-up capital.
iii.
Procedure to obtain License
The procedures for
incorporation of a non-profit organization are as follows:
a.
Availability and confirmation of the proposed name
by applying in Form 1A to the Registrar of Companies.
b.
Preparing MOA and AOA under the provision of the
Companies Act, 1956.
c.
An application to the Regional Director is to be
submitted for the license to establish the company without the words 'Limited'
or 'Private Limited'. The application shall be accompanied by the following documents:
·
copies each of MOA, AOA, lists containing details
of promoters, and proposed directors.
·
3 copies of Report and Account of the company.
·
Individual statement showing the assets and
liabilities of the company as on the date of application, estimated future
incomes and expenditure with the source of income and brief description of work
done.
·
A declaration by each person who are making the
application and that of any Advocate of Supreme Court or High Court or a
Chartered Accountant or Company Secretary in practice certifying that the requirements for
registration of the company has been compiled according to the provisions of the Act.
·
Documents showing the payment of the requisite fees
and a statement specifying the ground on which the application is made.
d.
A public notice as per Form set out in annexure II
of Regulations shall be made within one week or before the submission of the
application.
e.
The Regional Director shall issue the license to
the company if he is satisfied on compliance.
f.
All the necessary documents required for incorporation
along with the copy of license shall be filled with the registrar of the
Companies.
g.
On satisfaction, the Registrar of the Companies
shall issue the certificate of incorporation.
iv.
Revocation of license
i.
Central Government may rescind
the license granted to drop the words ‘Limited’ or ‘Private Limited’, if any alteration
is made without the approval of the Central Government, giving notice in
writing of its intention to the body and having given an opportunity of being
heard.
ii.
On rescinding the license,
the registrar shall enter the name “Limited” or “Private limited” accordingly
at the end of the name. [Sec. 25 (9), (10)]
-
If Central Government revokes the license to use
the words "Chamber of Commerce", it shall exclude these words from
its name.
-
Any default in complying with such requirements
shall be punished along with a fine which may extend to Rs.5,000 for every day
during which the default continues.
v.
Penalty for improper use of words
"Limited" and "Private Limited" (Sec. 631)
No person or Association should use the words
"Limited" or "Private Limited" at the end of its name,
unless duly incorporated as a company limited by shares, Violators are
punishable with fine which may extend to Rs. 500 for every day.
2.9 Investment Companies
These are
companies whose principal business is the acquisition of shares, stock, debentures
or other securities". Such type of companies buy & sell shares and
other instruments.
2.10 Defunct Company
i.
A defunct company means a company:
a. which never
commenced business
b. which is not
carrying on business and has either no assets or has such assets as shall not
be sufficient to meet the costs of liquidation.
ii. However, a
company is not considered as defunct if the cessation of business is due to the
conduct of winding up.
iii. Mere reduction
of members below statutory minimum does not render a company defunct.
iv. Under Sec.3, an
existing public company which could not raise minimum required capital is also
treated as defunct company.
2.11 Closely Held Companies
A public company
which has raised capital only from the members, director, relatives and kith
and kin of the promoters and has not raised capital from the 'public'.
2.12 Widely Held Companies
A Public Company
which has raised capital from the public by issue of prospectus and its shares
are dealt in two or more Stock Exchanges.
2.13 Illegal Association
If the number of members in
an association or partnership exceeds this statutory limit (10 for banking
business and 20 for any other business) and it is not registered under the
Companies Act, it is an illegal
association and has no legal existence (sec. 11). [Shyamlal
Roy Vs Madhu Sudhan Roy]
2.13.1 Consequences of
Illegal association
a.
Personal liability: All the members of illegal association becomes personally liable
towards the business and is punishable with fine which may extend to
Rs.10.000.
b.
Incapable of entering
into contract: An illegal association cannot enter into any
contract with a third party or among the members. It also cannot sue any
member or outsider regarding any matter, not even if the company is
subsequently registered. It cannot sue and cannot be sued in its own name.
c.
Winding up: An illegal association cannot be wound up under the Companies Act either
at the instance of a creditor or a member or the association itself since the
law does not contemplate its very existence. Ex.2.3
d.
Even a subsequent reduction in number of member can
not make an illegal association legal.
2.14 One Man Company
i.
The law does not permit incorporation of one-man –
company. At least 2 members are required to form a private company and at least
7 members are required to form a
public company (Sec. 12).
ii.
One man company normally means a company (usually
private) where one man almost holds its entire share capital and carries on the
business with limited liability (though for statutory requirements, one or two
of his relatives or friends hold some shares).
iii.
Like other company, one man company also as has its
own legal identity separate from its members.
iv.
The minimum number of member must be maintained
throughout the lifetime of the company .If number of members are reduced below
statutory minimum, the liabilities of member shall become unlimited, if the company
continues to carry on the business for 6 months after such reduction in number
of members (Sec. 45).
Examples:
Liability limited by shares
Ex.2.1 If the face value of a share in a company
is Rs.10 and a member has already paid Rs. 7 per share, he can be called upon
to pay not more than Rs.3 per share during the lifetime of the company. [Ref. 2.3.1.1]
Subsidiary of another subsidiary company
Ex.2.2 Company S is a subsidiary of Company H and
Company S1 is a subsidiary of Company S. Then Company S1 becomes a subsidiary
of company H (the controlling Company) also. If Company S2 is a subsidiary of
Company S1, Company S2 will be a subsidiary of Company S and consequently also
of Company H. [Ref. 2.5.2(c)]
Illegal Association
Ex.2.3
An association of 12
members starts a banking business without being registered. 4 members retire
and thereafter a suit is instituted by one of the continuing members for the
partition of assets of the business.
Held, an illegal association cannot be
wound up under the Companies Act either at the instance of a creditor, or a member
or the association itself. [Sec. 11] [Ref. 2.13.1(c)]
For more details, refer
to Business & Corporate Laws, by Asok Nadhani, BPB Publications, www.bpbonline.com,
bpbpublications@gmail.com
