Companylaw
Companylaw
UNIT-I
MEANING OF COMPANY:
The term “company” refers to a body corporate. In other words, it is a body incorporated in
accordance with the provisions of a specified Act. It is viewed to be a person created by law –
a jurisidical person. Its legal entity is distinct from its members and independent of even its
promoters who give birth to it.
DEFINITION COMPANY.
According to Haney’s definition, this brings out all its essentials. He observes, “A
company is an incorporated association; it is an artificial person created by law, having a
separate entity, with a perpetual succession and a common seal.”
According to sec 3 (1) (i) of Indian companies Act, a company is one “formed and
registered under this Act or an existing company”
The distinctive features of a joint stock company are in fact its merits. They make this
form of organisation very popular and better fitted for starting large-sized business ventures.
Limited Liability
The liability of a member of a joint stock company is limited to the amount reaming
unpaid on his shares. Once the full value of the shares is paid, a shareholder will not be called
upon to contribute anything further even if the assets are inadequate to meet business debts.
In view of this feature of limited liability, people come forward readily to invest in the shares
of joint stock companies. Thus the savings of the community which lie scattered can be easily
mobilised for financing business enterprises.
Professionalization of Management
In a company form of organisation there is complete divorce between ownership and
management. Though shareholders are the real owners, they do not have any right to manage
its affairs. Management of a company is entrusted to a Board of Directors elected by the
shareholders from among themselves. The Board can secure the services of experts in various
fields of production and management.
Better credit
A company enjoys greater public confidence and reputation in the capital market as its
functioning is subject to many legal restrictions with a view to protecting the interest of all
the shareholders. In view of these merits joint stock form of organisation is very popular and
is preferred to other forms especially for setting up large sized industrial undertakings.
Fraudulent Promoters
Unscrupulous promoters may mobilise large capital through attractively designed
prospectus, swindle the money and disappear, despite the stringent legal restrictions.
Shareholders lose their entire money. Such companies, known as ‘fly by night companies’ are
a threat to a healthy capital market.
Oligarchic Management
In theory, the management of a company is democratic, as it is in the hands of the
Board of Directors who are elected by the shareholders from among themselves. However, in
reality it proves to be a case of oligarchy. Due to the apathy and ignorance of a vast number
of shareholders and because of their being widely scattered throughout the length and breadth
of the country, a very few shareholders tend to get themselves elected as directors and
manage the affairs of a company. Since the voting strength depends on the number of shares,
the power is concentrated in a few hands. Also the shareholders attending the meeting are far
less. They do not have any voice in the management and the general meetings prove to be
only a farce.
The Corporate Veil Theory is a legal concept which separates the identity of the
company from its members. Hence, the members are shielded from the liabilities arising out of
the company’s actions.
Therefore, if the company incurs debts or contravenes any laws, then the members are
not liable for those errors and enjoy corporate insulation. In simpler words, the shareholders are
protected from the acts of the company.
The Corporate Veil Theory is a legal concept which separates the identity of the
company from its members. Hence, the members are shielded from the liabilities arising out of
the company’s actions. Therefore, if the company incurs debts or contravenes any laws, then the
members are not liable for those errors and enjoy corporate insulation. In simpler words, the
shareholders are protected from the acts of the company.
Scenarios under which the Courts consider piercing or lifting the corporate veil are as below,
There are cases where the Courts need to understand if the company is an enemy or
friend. In such cases, the Courts adopt the test of control. The Courts usually avoid piercing the
corporate veil, unless the public interest is in jeopardy. However, to ascertain if a company is an
enemy company, the Court might choose to do so.
In matters concerning evasion or circumvention of taxes, duties, etc., the Court might
disregard the corporate entity.
Imagine a company that is used to evade tax. In such cases, piercing the corporate veil
allows the Court to understand the real owner of the income of the company and make the said
person liable for legitimate taxes.
Sometimes the members of a company can create another company subsidiary company
to avoid certain legal obligations. In such cases, piercing the corporate veil allows the Courts to
understand the real transactions.
Imagine a company liable to share 20 percent of its profits with its employees as a
bonus. This is a legal obligation. To avoid this, the company opens a wholly owned subsidiary
company and transfers its investment holdings to it.
The new company formed has no assets of its own and no business income either. It is
completely dependent on the principal company.
Sometimes, the basis of the formation of a company is to act as an agent or trustee of its
members or of another company. In such cases, the company loses its individuality in favour of
its principal. Also, the principal is liable for the acts of such a company.
In cases where a company is formed for some illegal or improper purposes like defeating
the law, the Courts might decide to lift or pierce the corporate veil.
Chartered Companies
Companies established as a result of a charter granted by the King or Queen of a
country is known as chartered companies. The charter issued, governs their functioning.
Examples: East India Company and Bank of England. The provisions of the Companies Act
are not applicable to them. In India, such companies do not exist now.
Statutory Companies
Companies established by Special Acts of Parliament or State Legislatures are called
statutory companies. The special Acts under which they are established regulate their
functioning. Reserve Bank of India, Life Insurance Corporation of India etc. is of this type.
Unlimited Companies
The liability of the members of unlimited companies is unlimited. In other words,
their liability extends to their private properties also in the event of winding up. Unlimited
companies are almost non-existent.
Domestic Company
Companies registered under the Companies Act, 1956 or under earlier Acts are
considered domestic companies.
Foreign Company
Foreign company means a company incorporated outside India but having a place of
business in India. It has to furnish to the authorities the full address of the registered or
principal office of the company or a list of its directors or names and addresses of the
residents in India authorized to receive notices, documents, etc.
Government Companies
A Government company is one in which not less than 51% of the paid up capital is
held by the Central Government or by any one or more State Governments or partly by the
Central Governments and partly by one or more State Governments. Examples: Bharat Heavy
Electricals Limited, Steel Authority of India Limited, etc A subsidiary of a Government
company is also treated as a Government company. A Government company also enjoys a
separate corporate existence. It should not be identified with the Government and its
employees are not Government employees.
The Companies Act, 1956 constitutes the Company Law in India. It came into force
with effect from 1st April, 1956. It is a consolidating Act which presents the whole body of
the company law in a complete form and repeals earlier Companies Act and subsequent
amendments. It contains 658 sections and XV schedules and numerous forms.
1. It provides more stringent provisions relating to the company promoters and company
management.
3. This Act recognizes the institution of ‘Government Companies’ (in which government
holds at least 51% share capital) and makes special provisions for them.
5. It gives extensive powers to the Central Government and the Company Law Board to
intervene directly in affairs of a company in public interest, in recognition of the fact
that a public company should be regarded as a national asset and not as something of
exclusive concern to the shareholders or the directors.
With a view to ensuring greater efficiency, cohesion and despatch in the day-to-day
administration of the Companies Act, an administrative authority, namely, the Board of
Company Law Administration (popularly known as the Company Law Board) was set up in
February 1964, by Central Government, in accordance with Section 10F. The CLB is to
exercise and discharge such powers and functions of the Central Government under this Act
or any other law as may be conferred on it by the Central Government, by notification in the
Official Gazette under the provisions of this Act or that other law.
Under the provision of Companies (Amendment) Act, 1988, the powers and functions
of CLB have been enlarged. The new Board is quasi-judicial body. It has been vested with
considerable powers and functions. Some of these are judicial while others are administrative
in nature. The Board has the power to regulate its own procedure and act in its own
discretion. The Board would be guided by the principles of natural justice in the conduct of
its business.
The new CLB, as reconstituted on 31st May, 1991, has framed the CLB Regulations,
1991, for regulating the proceedings before it. The government has also prescribed the fee
making an application to the Company Law Board vide CLB (Fees on Application and
Petitions) Rules, 1991.
The CLB is to consist of such number of members, not exceeding 9, as the Central
Government may appoint by notification in the Official Gazette, and one of such member
shall be appointed as its Chairman. The members of the CLB shall possess such
qualifications and experience as may be prescribed. They may be appointed for such period,
not exceeding 3 years, as may be specified in the notification.
Section 10F, provides that an aggrieved person may file an appeal against any
decision or order of the CLB before the High Court, within 60 days from the date of
communication thereof, on any question of law. The said period of 60 days may be extended
by the Court to a further period up to 60 days on justifiable grounds. The order or decision of
the Board on any question of fact will be final and will not be appealable. The High Court to
which an appeal against the decision of CLB would lie.
Short title, extent and commencement .- (1) This Act may be called The Company
Secretaries Act, 1980.
It extends to the whole of India.
It shall come into force on such date as the Central Government may, by
notification in the Official Gazette, appoint.
Incorporation of the Institute.- (1) All persons whose names are entered in the Register of
the dissolved company immediately before the commencement of this Act and all persons
who may hereafter have their names entered in the Register to be maintained under this Act,
so long as they continue to have their names borne on the Register to be maintained under
this Act, are hereby constituted a body corporate by the name of the Institute of Company
Secretaries of India and all such persons shall be known as members of the Institute.
Entry of names in the Register.-(1) Any of the following persons shall be entitled to have
his name entered in the Register, namely:—
(a) any person who immediately before the commencement of this Act was an Associate or a
Fellow (including an Honorary Fellow) of the dissolved company;
(b) any person who is a holder of the Diploma in Company Secretaryship awarded by the
Government of India;
(c) any person who has passed the examinations conducted by the dissolved company and has
completed training either as specified by the dissolved company or as prescribed by the
Council, except any such person who is not a permanent resident of India;
Associates and Fellows.- (1) The members of the Institute shall be divided into two classes
designated respectively as Associates and Fellows.
(2) Any person other than a person to whom the provisions of sub-section (4) apply shall, on
his name being entered in the Register, be deemed to have become an Associate and as long
as his name remains so entered, shall be entitled to use the letters "A.C.S." after his name to
indicate that he is an Associate.
Establishment of Tribunal.-(1) On receipt of any application under section 10A, the Central
Government shall, by notification, establish a Tribunal consisting of a Presiding Officer and
two other Members to decide such dispute and the decision of such Tribunal
shall be final.
Functions of Council.-(1) The Institute shall function under the overall control, guidance and
supervision of the Council and the duty of carrying out the provisions of this Act shall be
vested in the Council.
(2) In particular, and without prejudice to the generality of the foregoing powers, the duties of
the Council shall include-
(a) To approve academic courses and their contents;
(b) The prescribing of fees for the examination of candidates for enrolment;
(c) The prescribing of qualifications for entry in the Register;
(d) The recognition of foreign qualifications and training for purposes of enrolment;
(e) The prescribing of guidelines for granting or refusal of certificates of practice under this
Act;
(f) The levy of fees from members, examinees and other persons;
(g) The regulation and maintenance of the status and standard of professional qualifications
of members of the Institute;
(h) The carrying out, by granting financial assistance to persons other than members of the
References
Publications.
5. Company Law and Secretarial Practice - Dr. PMS .Abdul Gaffoor and Dr.S.
1. What is company?
2. Define company.
3. What is Holding Company?
4. What is Government Company?