Definition of Company & its Characteristics

Sec 3(1)(i) and (ii) of the Companies Act define a

company as “a company formed and registered
under this Act or an existing company.
A company may, however, be defined as an
incorporated association, which is an artificial legal
person, having a separate legal entity, with a
perpetual succession, a common seal, a common
capital comprised of transferable shares and
carrying limited liability.
 Characteristics of a Company

(i) Incorporated Association

(ii) Artificial Legal Person
(iii) Separate Legal Entity
- Salomon V Salomon & Co. Ltd (1897)
- Salomon sold his business as leather merchant for
30,000 British Pound (BP) to Salomon & Co. Ltd which
consisted of Salomon himself, his wife, his daughter and
four sons. The purchase consideration was paid by
company by allotment of 20,000 fully paid 1 BP shares
and 10,000 BP in debentures conferring a floating
charge over all the company’s assets to Salomon.
One share of 1 BP each was subscribed by the
remaining six members of his family.

Salomon was the MD of the company and as he

virtually had whole of the stock and he had
absolute control over the company.

Only a year later, the company became insolvent

and winding up commenced. On winding up the
statement of affairs of the company was assets
6000 BP, Liabilities Salomon as debenture holder
10,000 BP and unsecured creditors 7000 BP.
(iv) Perpetual Succession

(v) Common Seal

(vi) Limited Liability- The liability of the members for

the debts of the company is limited to the amount
unpaid on their shares.

(vii) Transferability of the shares

 Illegal Associations

According to the Sec 11, Companies Act, 1956 in

case of a partnership firm doing banking business
it is mandatory to get it incorporated under the
companies act whenever total number of partners
are more than 10 and in other cases a partnership
firm whenever has more than 20 partners it should
mandatorily be registered under the Companies
Act, 1956 otherwise it shall be treated as an illegal
association.
Consequences of Non-registration as per Sec
11, Companies Act, 1956
► No legal existence
► Unlimited Personal Liability
► Fine- Sub section 5 of section 11 provides that
every member of such illegal association will be
punishable with fine which may extend to Rs
10,000/-
 Incorporation of Company

A company is bought into existence by a legal process called

incorporation. This is effected by registration with the
Registrar of Companies (ROC) . ROC are generally appointed
for each state by the Central Government.
For incorporation of a company the following steps are taken
by promoters-
(i) Availability of Name with the ROC;
(ii) To get a letter of intent, if company’s business comes
under Industries (Development & Regulation) Act, 1951
(iii) To fix underwriters, brokers, bankers, solicitors, auditors
and signatories to the memorandum.
(iv) To get Memorandum and Articles of Association prepared
and printed.
 Kinds of Companies

Kinds of Companies according to the mode of

incorporation:

(i) Statutory Company – RBI, SBI,LIC FCI etc

(ii) Incorporated or Registered Company
Kinds of Registered Companies on the basis of
number of members
► Private Companies; &
► Public Companies
1. Private Company According to Section 3(1)(iii), a
private company means a company which has a
minimum paid up capital of Rs 1 lakh or such
higher paid up capital as may be prescribed and
by its article of association:
(i) restricts the right of the members to transfer
share, if any.
 (ii) Limits the number of its members to fifty,
excluding employees of such company
(iii) prohibits any invitation to the public to
subscribe for any share in, or debenture of
the company; and
(iv) prohibits any invitation or acceptance of
deposits from persons other than its
members, directors or their relatives.
 Public Company (Sec 3(1)(iv)

According to Sec 3(1)(iv) a public company means a

company which:
(i) is not a private company;
(ii) has a minimum paid up capital of 5 lakh or such
higher paid up capital as may be prescribed;
(iii) is a private company subsidiary of a public
company;
(iv) does not have any restriction on the transfer of
share;
(v) does not limit the maximum number of
members;
(vi) Can invite public for the subscription of its
share and debentures;&
(vii) can invite or accept deposits from public.
Kinds of Registered Companies on the Basis of
Liability of Members
On the basis of liability of members, the
Companies Act makes provision for the registration
of three types of companies, namely:

(i) Companies Limited by Shares; or

(ii) Companies Limited by Guarantee; or
(iii) Unlimited Companies.
Each of these types may be a public company or
private company (Sec 12)
 Companies Limited by Shares

A company having the liability of its members

limited by the memorandum, to the amount, if
any, unpaid on shares respectively held by them is
termed as ‘a co. limited by shares’ [Sec 12(2)(a)].
Such a company is generally called a limited
liability company. The liability can be enforced at
any time during the existence and also during the
winding up of the company. Such a company must
have share capital as extent of liability is
determined by face value of shares. Most of the
companies in India are of this type.
 Companies Limited by Guarantee

A company limited by guarantee may be defined

as ‘a company having the liability of its members
limited by its memorandum to such amount as the
members may respectively thereby undertake to
contribute to the assets of the company in the
event of its being wound up’. [Sec 12(2)(b)]. The
amount guaranteed by each member cannot be
demanded until the company is wound up,
therefore, it is like reserve capital.
Such company may or may not have share capital.
These types of companies are normally formed
without share capital for non trading purposes
such as promotion of commerce, art, science,
sports etc such as Chambers of Commerce, Trade
Associations and Sports Clubs etc are guarantee
companies because they neither require huge
capital nor aim profit making.
 Unlimited Companies

A company having no limit on the liability of its

members is an unlimited company. [Sec 12(2)
(c)]. The liability of members of such company is
unlimited. Like a partnership, every member is
liable to contribute, in proportion to his interest
in the company, towards the amount required
for payment of the total liability of the company.
If one is unable to contribute anything, other
members have to share deficiency in proportion
to their capital in the company.
-Partnership and Unlimited Companies
 Other Kinds of Companies

► Licensed Companies
► One Man Company or Family Company
Such as Salomon & Company Ltd.
► Foreign Company – is a company incorporated
outside India
► Government Company – such co. in which not less
than 51% of paid up capital share capital is held
by the central or state government.
► Holding Company & Subsidiary Company
 Licensed Company or Not for Profit Company

Sec 25 of the Act provides for such company.

Before registration a licensed is obtained from
central government. Any association formed for
promotion of art, science, religion, charity or any
other useful object which does not intend to apply
its profit for payment of any dividend to its
members but instead to apply its income for
promoting its objects can obtain a license from the
government and can get registered itself as a
company with limited liability.
On registration such company enjoys following
exemptions and privileges:

(i) such co. may exclude the word limited or

private limited from their names.
(ii) They are registered without payment of stamp
duty on their memorandum and articles.
(iii) They are exempted from minimum paid up
capital.

The government may revoke the license at any

time of such companies, if fundamental conditions
of the license are violated.
 Exemptions & Privileges of Private Companies

(i) Only two person (seven in public co. may make

a company [Sec 12]
(ii) It can commence business immediately on
incorporation as it has not to wait to obtain a
certificate for the commencement of business
[Sec 149(7)]
(iii) It is allowed to work with only two directors
whereas at least three are required in a public
company.
(iv) At the time of getting the company incorporated
With the ROC, directors are not required to file with
Registrar their consent in writing to act in that
capacity and their undertaking to take up
qualification shares, if any [Sec 266(5)]
(v) It need not prepare and file ‘prospectus’ or
‘statement in lieu of prospectus’ with the Registrar.
[Sec 70(3)]
(vi) It can proceed to allot shares without having to
wait for any such thing as ‘minimum subscription’
[Sec 69]
(vii) It is exempted from the requirement of holding
statutory meeting and filing statutory report. A
public company must hold such a meeting after one
month and before six months from the obtaining
certificate to commence business in order to
acquaint the shareholders, about the details of
company’s working till that day [Sec 165]

(viii) Right of pre-emption does not apply to such a

private company. According to Sec 81, a public
company, in certain cases, proposing to increase
its subscribed capital by allotment of further
shares, must offer them to existing equity
shareholders prorata in the first instance.
A private company is free to allot new issues to
outsiders [Sec 81(3)]
(ix) It enjoys considerable freedom with regard to its
directors, MD or manager. It is not required to
comply with restrictions relating to the agencies of
management which are applicable to public
companies. Eg:

(a) All its directors can be permanent life

directors and the requirement of rotation does
not apply [Sec 255]
(b) All its directors can be appointed en bloc
by a single resolution [Sec. 255]
(c) Number of Directors can be increased
beyond the limit fixed in the articles of association
without Central Govt sanction
[Sec 259]
 (d) Directors are not required to file with the
Registrar, within 30 days of their first
appointment, their consent in writing to act as
such director [Sec 264(3)]
(d) An interested director may participate in
the board meeting and exercise his vote.
[Sec 300]
(e) Central Govt’s approval is not requred
either for appointment or reappointment of a
MD or wholetime directors [Sec 268]
(f) It may provide by AOA, a special
disqualification for appointment of directors
 (g) No restriction on number of companies
to be managed by a director (15 in case of
public co) or by MD or managers (2 in case
of a public co)
[Sec 275, 316 and 386]
(h) Restriction on period of appointment of a
MD/Manager(5yrs in case of a public
company) not applicable [Sec 317]
(i) No restriction on payment of
remuneration to Directors, MD etc (fixed at 11%
of annual net profit for managerial personnel
in case of a public co) Sec 198)
 Public & Private Company

Public Co. Private Co.

(i) Min Paid up Capital 5 L (i) 1 lakh
(ii) No of members
7 – no maximum limit (ii) 2-50
(iii) Min no of Directors 3 (iii) 2
(iv) Transfer of Share (iv) The right is restricted
a shareholder can by articles of
transfer his shares freely association, requires
without restriction. prior permission of
Board of Directors
 Public & Private Company

Public Co. Private Co.

(v) Public subscription
A public co. can invite
public for the subscription
of its share and
debentures
(vi) Commencement of
Business – only after
getting the Certificate of
Commencement of
Business
(v) A private co. by its
Articles of Association
prohibits any invitation
to the public for any
share
(vi) Immediately
 Public & Private Company

Public Company Private Co.

(vii) Issue of Prospectus (vii) Need not prepare
Must file with ROC a
prospectus or
‘Statement in lieu of
prospectus’
(viii) Can proceed to
(viii) Allotment of share allot share without
minimum subscription minimum subscription
is necessary
 Public & Private Company

Public Co Private Co
(ix) Statutory Meeting (ix) Is not required to
Must hold such hold such meeting
meeting after one
month and before 6
months from the date
of obtaining the
certificate of
commencement of
business
 Public & Private Company
Public Company Private Company
(x) Provision regarding (x) no such approval is
Directors required
Permission of Central
Govt is required for
appointment or
reappointment of MD
or whole time directors
 Public & Private Company

Public Co Private Co
(xi) Managerial (xi) No such restriction
Remuneration
Maximum managerial
remuneration is fixed
at 11% of annual net
profit
(xii) Index of members
(xii) Not required to keep
must keep in case an index of members
more than 50
 Conversion of Companies
► Automatic Conversion by default
In case of a Private co, if membership exceeds 50,
it permits free transfer of shares, invites public to
subscribe to its shares or debentures it becomes a
public co automatically.
► Deliberate Conversion
A private company may, at anytime by a special
resolution delete from the its articles the four
compulsory restrictions as to (i) membership, (ii)
transfer of shares, (iii) public share & (iv)
acceptance of public deposits
-to the ROC, Altered Articles, Prospectus or
Statement in lieu of Prospectus in 30 days