LAB

UNIT – I NATURE AND KINDS OF COMPANIES, LIFTING OF CORPORATE VEIL, INCORPORATION AND REGISTRATION OF COMPANY

Presented by: Vineet Vij

DEFINITION OF A COMPANY

  • Statutory Definition: Under Section 2(20) of the Companies Act, 2013, a company refers to any entity incorporated under this Act or any previous company law.
  • Separate Legal Entity: A company is a distinct legal person, separate from its members, capable of surviving beyond the lives of its members and created solely by law.
  • Economic & Social Role: A company serves as a cooperative mechanism for conducting business, pooling capital, and achieving social and economic goals, managed by professionals.
  • Judicial View: Courts have highlighted that only registered companies enjoy separate legal personality; unregistered firms do not.

NATURE OF COMPANY

  • A company is an artificial person created by law, possessing a separate entity, with perpetual succession and its members having limited liability.
  • Key characteristics:
    • Artificial Person
    • Separate Entity
    • Perpetual Succession
    • Limited Liability

KINDS OF COMPANIES

  • Basis
    • Type of Company: Determines classification based on statutory provisions.
    • Relevant Section(s): Specific sections in the Companies Act that govern types of companies.
    • Explanation: A summary of features that define each category.

Members

  • One Person Company (OPC):

    • Section(s): Sec. 3(1)(c), 2(62)
    • Description: Single member; treated as private company; minimum of 1 director; shares not freely transferable.

  • Private Company:

    • Section(s): Sec. 3(1)(b), 2(68)
    • Description: 2 to 200 members; minimum of 2 directors; shares have restricted transferability.

  • Public Company:

    • Section(s): Sec. 3(1)(a), 2(71)
    • Description: Minimum of 7 members; minimum of 3 directors; shares freely transferable.

Control

  • Holding Company:

    • Section(s): Sec. 2(46)
    • Description: Parent company controlling subsidiaries via equity, voting rights, or board composition.

  • Subsidiary Company:

    • Section(s): Sec. 2(87)
    • Description: Controlled by holding company; can be wholly owned or deemed subsidiary.

  • Associate Company:

    • Section(s): Sec. 2(6)
    • Description: Significant influence (≥20% voting rights); includes joint ventures.

Listing

  • Listed Company:

    • Section(s): Sec. 2(52)
    • Description: Securities listed on recognized stock exchange; regulated by SEBI.

  • Unlisted Company:

    • Section(s): Not specified
    • Description: Securities not listed; governed by the Companies Act, 2013.

KINDS OF COMPANIES (Continued)

Ownership

  • Government Company:

    • Section(s): Sec. 2(45)
    • Description: ≥51% share capital held by the government, includes subsidiaries.

  • Foreign Company:

    • Section(s): Sec. 2(42)
    • Description: Incorporated outside India but has business presence in India.

  • Non-Profit Company (Sec. 8 Co.):

    • Section(s): Sec. 8
    • Description: Formed for charitable/social objectives; profits to be applied to objectives; no dividends distributed.

  • Nidhi Company:

    • Section(s): Sec. 406
    • Description: Declared by the government; a mutual benefit society with special exemptions.

Size

  • Small Company:
    • Section(s): Sec. 2(85)
    • Description: Paid-up capital ₹50 lakh–₹10 crore; turnover ₹2 crore–₹100 crore; excludes holding/subsidiary, Sec. 8, and special act companies.

Miscellaneous

  • Dormant Company:

    • Section(s): Sec. 455
    • Description: Formed for future projects/asset holding; no significant transactions; requires ROC approval.

  • Inactive Company:

    • Section(s): Not specified
    • Description: No business/operations or filings for the last 2 years.

EXAMPLES

  • Ravi wants to start a company where he can invite the public to buy shares and allow free transfer of those shares.

    • Correct Answer: B) Public Company

  • Arjun wants to start a business alone but also desires limited liability protection.

    • Correct Answer: B) One Person Company (OPC)

CONCEPT OF CORPORATE VEIL

  • Before discussing the lifting of the corporate veil, it is essential to define what a company is.
  • Section 3(1)(i) of the Companies Act states: A company means a company formed and registered under this Act or an existing company as defined in section 3 (1)(ii).
  • A corporate veil is a legal concept differentiating a corporation's personality from that of its shareholders, which protects shareholders from personal liabilities for corporate debts.

LIFTING OF CORPORATE VEIL

  • Sometimes, the corporate personality of a company is misused to commit fraud or illegal acts.
  • As a result, the corporate veil may need to be lifted to identify individuals behind the corporate façade who may be liable.
  • Lifting the corporate veil allows examination beyond the corporate entity to disclose the individuals controlling the company..

USE OF CORPORATE VEIL FOR HIDING CRIMINAL ACTIVITIES

  • Case Law Reference: Salomon vs. Salomon & Co. Ltd [1896] - The principle of separate entity established.

KEY PRINCIPLES FROM INDIAN JURISPRUDENCE

  • Courts typically uphold that separate legal personality is a general rule while lifting the corporate veil is an exception justified by clear evidence.
  • Factors Justifying Lifting the Veil:
    • When companies are used to perpetrate fraud or evade obligations.
    • If entities are shams masking actual control to defeat law.
    • If public interest legislation is undermined through corporate form abuse.

KEY COURT DECISIONS

  1. State of UP v. Renusagar Power Co. [1988]

    • The Supreme Court treated a parent company (Hindalco) and subsidiary as one entity for tax purposes, emphasizing economic reality.

  2. Delhi Development Authority v. Skipper Construction Co. [1996]

    • Corporate veil was lifted due to promoters fraudulently using the company structure to defraud homebuyers.

  3. LIC of India v. Escorts Ltd. [1986]

    • Court lifted the veil to establish true ownership when companies operated as a single unit.

  4. Vodafone International Holdings BV v. Union of India [2012]

    • Veil not lifted as the transaction was deemed genuine, not sham.

  5. Balwant Rai Saluja v. Air India Ltd. [2014]

    • Underlined that lifting the veil is an exception requiring strong fraud evidence.

PROCESS OF FORMATION OF A COMPANY

  • Promotion Stage: The initial phase of forming a company, where promoters are involved.

PROMOTER

  • Definition: Section 2(69) defines a promoter as any individual who helps to form a company, including those named in the prospectus or involved in managing the company's affairs.

PROMOTER’S REMUNERATION

  • Promoters may receive compensation for their contributions in various forms, including:
    • Lump sum payment for services rendered.
    • Profits from transactions with the company after full disclosure.
    • Selling property to the company under conditions disclosed in the prospectus.

PROMOTER’S LIABILITY

  • Promoters can incur liabilities for contractual breaches and false statements in the prospectus.

INCORPORATION OF A COMPANY

  • The legal process requiring strict compliance with documentary obligations.

CERTIFICATE OF INCORPORATION & CORPORATE IDENTITY NUMBER

  • Certificate of Incorporation: This is the legal document affirming the compliance with the Companies Act and signifies the birth of the company.
  • Corporate Identity Number (CIN): Assigned at incorporation, it is unique to the company.

REGISTRATION

  • The process involves application reviews by the Registrar of Companies (RoC).

EFFECT OF REGISTRATION – SECTION 9

  • Upon incorporation, subscribers become a corporate entity capable of exercising specific legal functions.

RAISING/FLOATATION OF CAPITAL

  • The financial mechanisms for generating necessary funds.

MEETINGS, RESOLUTIONS, VOTING BY SHAREHOLDERS, MINUTES, CORPORATE SOCIAL RESPONSIBILITY

  • Adherence to structured governance and decision-making processes for effective company management.
  • Companies are expected to comply with CSR norms as specified in the Companies Act.

COMPANIES ACT AND KEY SECTIONS

  • Specific Sections on Responsibilities: Various sections outline the duties and powers of directors, regulations on holding meetings, filing requirements, and corporate governance principles that companies must follow for compliance.

  • Section 108: Outlines procedures for voting, and sections detailing financial reporting and auditing.

CONCLUSION

  • Understanding the companies act is vital for effective corporate governance, compliance, and navigating legal responsibilities for business operations.
  • The approach to corporate structure and administration reflects broader economic and societal aspirations aligning with regulatory frameworks.