COMPANY LAW • Transferable shares – in case of public
company, ‘right to first offer’ and ‘right to first
Meaning and Nature of Company
• Previously Companies Act 1956, now
Companies Act 2013 (470 sections, 29
chapters and 7 schedules)
• Definitions of Company
• Sec. 2 (20) – A company formed and
registered under the Act
• Lord Justice Lindley- A Company is an
association of many persons who contribute
money or monies worth to a common stock
and employed in some trade or business
and who share the profit and loss arising
there-from. The common stock so
contributed is denoted in money and is the
capital of the company. The persons who
contribute to it or to whom it pertains are
members. The proportion of capital to
which each member is entitled is his share.
The shares are always transferable through
the right to transfer is often more or less
restricted
Characteristics of a Company
• Incorporated Association minimum number of
members: 7 for public company and 2 for
private company)
• Separate Legal Entity – distinct from the
persons who created it (Salomon v Salomon)
1895-99] All ER 33 (HL))
• Artificial Legal Person- juristic person, no body
of a natural person
• Perpetual Succession
• Limited Liability- liability to pay debts limited
(limited by shares, limited by guarantee,
unlimited)
• Separate Property – can own property in its
name
refusal’ clauses can be included in the
shareholder’s agreement.
• Common seal- official signature of the
company
• Capacity to Sue and being sued
Lifting of Corporate Veil
• The façade of corporate personality removed to
identify the persons who are really guilty
• In the interest of the members and in public
interest
• Against those who misuse corporate personality
• In the case of Life Insurance Corporation of
India v. Escorts Ltd. (1986), SC held that:
• While it is firmly established ever since
Salomon v. A. Salomon & Co. Limited [1897]
A.C. 22, was decided that a company has an
independent and legal personality distinct
from the individuals who are its members, it
has since been held that the corporate veil
may be lifted, the corporate personality
may be ignored and the individual members
recognised for who they are in certain
exceptional circumstances[…] Generally and
broadly speaking, the corporate veil may be
lifted where a statute itself contemplates
lifting the veil, or fraud or improper conduct
is intended to be prevented or a taxing
statute or a beneficent statute is sought to
be evaded or where associated companies
are inextricably connected as to be in
reality, part of one concern.
• Circumstances under which the courts lift the
corporate veil:
• Under statutory provisions- as per the
expression provisions of the Act
• Under Judicial Interpretations
 Under Statutory Provisions
(lifting of corporate veil continued)
• Misrepresentation in prospectus (Ss.’ 34 & 35)
• Failure to return application money (S. 39)-
minimum subscription, as stated in prospectus
not received, in case of public issue of shares
• Mis-description of name (s.12)
• For facilitating the task of an inspector
appointed under s. 210/212/213 to investigate
the affairs of the company (s. 219)
• For investigation of ownership of company (s.
216)
• Fraudulent conduct of business (s. 339)- in case
of winding up
• Liability of ultra-vires acts – Directors and
officers of company will be personally liable if
their act is ultra vires the company
Under Judicial Interpretations
(lifting of corporate veil continued)
• For determining the enemy character of a
company
• For the benefit of revenue
• For prevention of fraud and improper conduct
• Others, where company is a mere sham or cloak
• Formation of subsidiaries to act as an agent
• Where a company acts as an agent for its
shareholders
• In case of economic offences
• Where company is used to avoid welfare
legislation
• Where company is used for some illegal or
improper purpose
Types of Companies
 On the Basis of mode of Incorporation
• Chartered Companies e.g.: East India
Company.
 Formed by grant of a charter by the
Crown.
 No longer used to incorporate trading
companies.
• Statutory Companies – created by special
Act e.g.: LIC, SBI, RBI
 Formed by private Act of Parliament.
 Formerly used to incorporate public
utilities such as gas, electricity and
railways.
• Registered Companies- registered under
the Act
 Formed by registration under the
Companies Act
 Registration is the most commonly used
means of forming a company and
virtually the only method now used to
form a trading company.
 On the basis of Liability of Members
 Limited by Shares
 Limited by guarantee- members
undertake to contribute in event of
winding up
 Unlimited- all members liable for debts,
like in partnership, proportion to his
interest
 On the basis of Number of Members
 One person company – only one
member (introduced under the 2013
Act)
 Private - Minimum 2 to maximum 200
 Public – Minimum 7 – no maximum
 Other types of Companies
 Government Companies – Govt. has
51% or more shareholding
 Foreign Company – company registered
abroad but place of business in India
 Holding and Subsidiary Company –
Holding company having control over its
subsidiary
  Small Company- paid-up capital not
exceeding 50 L, turnover does not
exceed 2 Cr
 Producers Companies – involved in production,
harvesting etc. of primary produce
Companies Limited by Shares
i. The most common kind of registered company.
ii. Members of the company take shares issued by
the company. Each share is assigned a nominal
value - the amount that must be paid to the
company for the share. Members may also
agree to pay an extra amount - called a
premium.
iii. When the company is registered, its
memorandum must state the total nominal
value of all the shares it is going to issue (called
the registered capital, or nominal capital or
authorized share capital).
• The memorandum also states the number
of shares to be issued: e.g. 10,000 shares of
Rs.1 each = registered capital of Rs. 10,000.
iv. Liability of a member (shareholder), when the
company is wound up is limited to the amount,
if any, of the nominal value of his shares which
has not been paid.
• (Shareholder is also contractually bound to
pay any premium which has not been paid).
v. Shares are normally partly or fully paid for when
issued, so company will have a contributed
capital.
• Companies Limited by Shares may be Public
or Private
Companies Limited by Guarantee
i. Members agree to contribute a specified
amount to the company’s assets in the event of
the company being wound up. (Total amount
payable by all members is called the "guarantee
fund")
ii. Members do not have to pay anything as long
as company is a going concern - so company has
no contributed capital.
iii. Companies limited by guarantee are not usually
formed for business ventures.
iv. Prior to 1980, a company could be registered as
a company limited by guarantee, but also have
a share capital - these are called "hybrid
companies"
Unlimited Companies
i. Members have unlimited liability (If company is
being wound up, members can be made to
contribute to the company’s assets without
limit to enable it to pay its debts.)
ii. Cannot be public companies.
iii. Can be set up with or without a share capital.
iv. Not subject to the same restrictions on
alteration of capital as other types of company,
and do not normally have to file annual
accounts.
Formation and Incorporation of a Company
Stages of Incorporation
• Promotion
• Registration /Incorporation of Company
• The Memorandum of Association
• The Article of Association
• List of Directors
• A Statutory declaration of compliance
• Any agreement with the relevant
persons of the proposed company
• Floatation/Raising of Capital
• Commencement of Business
 Promoters
• Promoters of a company are concerned with
taking the steps necessary for incorporation.
• Promoter may be individual, syndicate,
association, partner or company.
• Sec. 2 (69) of the Companies Act 2013 defines
promoter as a person:
a. who has been named as such in a
prospectus or is identified by the
company in the annual return; or
b. who has control over the affairs of the
company, directly or indirectly whether
as a shareholder, director or otherwise;
or
c. in accordance with whose advice,
directions or instructions the Board of
Directors of the company is accustomed
to act:
• A person who is acting merely in a professional
capacity; – not a promoter
• Promoter denotes any individual, syndicate,
association, partnership or a company which
takes all the necessary steps to create and
mould a company and set it going. The
promoter originates the scheme for the
formation of the company; gets together the
subscribers to the memorandum; gets
memorandum and articles prepared, executed
and registered; finds the bankers, brokers and
legal advisors, locates the first directors, settles
the terms of preliminary contracts with vendors
and agreement with underwriters and makes
arrangements for preparation, advertisement
and circulation of the prospectus and
placement of the capital.
• When promotion begins and ends – Promotion
begins on the day the work of floating the
company starts and ends when the Board of
directors has been formed and the Board starts
governing the company.
• Legal position of a promoter – not an agent or
trustee; fiduciary position towards the company
(relation of trust and confidence)
• Duties of promoter:
1. to make full disclosure of all material facts
relating to formation of the company;
2. not to make any secret profit at the expense of
the company he promotes, without the
knowledge and consent of the company and if
he does the company can compel to account for
it (Case: Glunckstein v Barnes [1900] AC 240).
Liabilities of Promoters
• For Non-disclosure at the time of contract, the
company may:
• Rescind the contract and recover the
purchase price where he sold his property
to the company
• Recover the profit made, even though
rescission is not claimed or is impossible
• Claim damages for breach of his
fiduciary duty. The measure of damages will
be the difference between the market value
of the property and the contract price
• Under companies Act:
 S. 26 – enumerate matters that should
be stated and the reports that should be set
out in the prospectus. If this is not
complied, liability under s. 35
 S. 35 – civil liabilities for any
misstatements made in the prospectus.
Liable to pay compensation to every person
who subscribed for share or debentures for
any loss or damage sustained by him on
account of the untrue statement in the
prospectus
 S. 34 – criminal liabilities for issuing
prospectus containing untrue statements.
Liable for imprisonment not less than 6
months and may extend to 10 years. In case
 of fraud involving public interest, term is and complying with the requirements of
minimum 3 years. this Act

Pre-incorporation contracts

• S. 15 (h) of the Specific Relief Act 1963- where
the promoters of a public company have made
a contract before its incorporation for the
purposes of the company and if the contract is
warranted by the terms of its incorporation, the
company may enforce it. “Warranted by the
terms of incorporation” means within the
scope of the company’s objects as stated in the
memorandum.
Procedure for registration/incorporation
• Deciding the type of company - private or
public
• Application for availability/reservation of name-
can propose up to 6 names
• Preparation of Memorandum and Articles of
Association

• Company is therefore allowed to adopt and • Preparation of other documents: power of

enforce its pre-incorporation claims against
third party
• Also third party can enforce contract against
the company if:
• Company has adopted the same after
incorporation; and
• The contract is warranted by the terms
of incorporation
attorney; consent of the first directors (to be
filed); particulars of managers, etc.; affidavit by
subscribers to the memorandum and first
directors; address for communication and
notice of registered address
• Statutory declaration- signed by advocate,
chartered accountant
• Filing of documents for registration

• Liability of promoters vis-à-vis pre-

incorporation contract – promoters liable to
pay damages for failure to perform the
promises made in the company’s name

Formation of a company

1. A company may be formed for any lawful

purpose by—

a. seven or more persons, where the

company to be formed is to be a public
CHECKLIST
company;
 Definition
b. two or more persons, where the
company to be formed is to be a private  Characteristics
company; or
 Lifting of Corporate Veil
c. one person, where the company to be
formed is to be One Person Company that  Types of Companies
is to say, a private company, by subscribing
 Formation of a Company
their names or his name to a memorandum
 Promoters

 Pre-incorporation contracts