Company definition section 2(20)

Company a Company incorporated under this Act or under any previous company law.

1. Separate Legal Entity: There are distinctive features between different forms
of organisations and the most striking feature in the company form of organisation
vis-à-vis the other forms of business organisations is that it acquires a unique
character of being a separate legal entity. In other words. when a company la
registered, it is clothed with a legal personality, it comes to have almost the
same rights and powers as a human being. Ils existence is distinct and separate
from that of its members. A company can own property, have bank account, raise
loans, incur liabilities and enter into contracks

(a) It is at law, a person which is different from the subscribers to the

memorandum of association Its personality is distinct and separate from the
personality of those who compose it

(b) Even members can contract with company, acquire right against it or incur
liability to it. For the debts of the company, only its creditors can sue it and
not its members.

A company is capable of owning, enjoying and disposing of property in its own name.
Although the capital and assets are contributed by the shareholders, the company
becomes the owner of its capital and assets. The shareholders are not the private
or joint owners of the company's property.

A member does not even have an insurable interest in the property of the company.
The leading case on this point is of Macaura Vs. Northern Assurance Co. Limited
(1925):

2. Perpetual Succession: Members may die or change, but the company goes on till it
is wound up on the grounds specified by the Act. The shares of the company may
change hands infinitely but that does not affect the existence of the company.
Since a company is an artificial person created by law, law alone can bring an end
to its life. Its, existence is not affected by the death or insolvency of its
members.

3.Limited Liability: The liability of a member depends upon the kind of company of
which he is a member. We know that company is a separate legal entity which is
distinct from its members

(i) Thus, in the case of a limited liability company, the debts of the company in
totality do not become the debts of the shareholders. The liability of the members
of the company is limited to the extent of the nominal value of shares held by
them. In no case can the shareholders be asked to pay anything more than the unpaid
value of their shares

(ii) In the case of a company limited by guarantee, the members are liable only to
the extent of the amount guaranteed by them and that too only when the company goes
into liquidation.

(iii) However, if it is an unlimited company, the liability of its members is

unlimited as well.

4. Artificial Legal Person:

(1) A company is an artificial person as it is created by a process other than

natural birth. It is legal or judicial as it is created by law. It is a person
since it is clothed with all the rights of an Individual
(2) Further, the company being a separate legal entity can own property, have
banking account, raise loans, Incur liabilities and enter into contracts. Even
members can contract with company, acquire right against it or incur liability to
it. It can sue and be sued in its own name. It can do everything which any natural
person can do except be sent to jail, take an oath, marry or practice a leamed
profession. Hence, it is a legal person in its own sense.

(3) As the company is an artificial person, it can act only through some human
agency, viz.. directors. The directors cannot control affairs of the company and
act as its agency, but they are not the "agents" of the members of the company. The
directors can either on their own or through the common seal (of the company) can
authenticate its formal acts.

(4) Thus, a company is called an artificial legal person.

5. Common. Seal: A company being an artificial person is not bestowed with a body
of a natural being. Therefore, it works through the agency of human beings. Common
seal is the official signature of a company, which is affixed by the officers and
employees of the company on its every document. The common seal is a seal used by a
corporation as the symbol of its incorporation

The Companies (Amendment) Act, 2015 has made the common seal optional by omitting
the words "and a common seal" from Section 9 so as to provide an altemative mode of
authorization for companies who opt not to have a common seal. the authorization
shall be made by two directors or by a director and the Company Secretary wherever
the company has appointed a Company Secretary

Corporate Veil: Corporate Veil refers to a legal concept whereby the company is
identified separately from the members of the company. The term Corporate Veil
refers to the concept that members of a company are shielded from liability
connected to the company’s actions. If the company incurs any debts or contravenes
any laws, the corporate veil concept implies that members should not be liable for
those errors. In other words, they enjoy corporate insulation. Thus, the
shareholders are protected from the acts of the company. The Salomon Vs. Salomon
and Co Ltd. laid down the foundation of the concept of corporate veil or
independent corporate personality.
In Salomon vs. Salomon & Co. Ltd.

“The Company is at law a different person altogether from the subscribers to the
memorandum, and though it may be that after incorporation the business is precisely
the same as it was before and the same persons are managers, and the same hands
receive the profits, the company is not in law the agent of the subscribers or
trustees for them. Nor are the subscribers, as members, liable, in any shape or
form, except to the extent and in the manner provided by the Act.”
Thus, this case clearly established that company has its own existence and as a
result, a shareholder cannot be held liable for the acts of the company even though
he holds virtually the entire share capital.
(ii) Lifting of Corporate Veil: The following are the cases where company law
disregards
the principle of corporate personality or the principle that the company is a legal
entity
distinct and separate from its shareholders or members:
(1) To determine the character of the company i.e. to find out whether co-enemy or
friend: Daimler Co. Ltd. vs. Continental Tyre & Rubber Co., unlike a natural
person, a company does not have mind or conscience; therefore, it cannot be a
friend or foe. It may, however, be characterised as an enemy company, if its
affairs are under the control of people of an enemy country. For this purpose, the
Court may examine the character of the persons who are really at the helm of
affairs of the company.
(2) To protect revenue/tax: In [Dinshaw Maneckjee Petit], it was held that the
company was not a genuine company at all but merely the assessee himself disguised
under the legal entity of a limited company. The assessee earned huge income by way
of dividends and interest. So, he opened some companies and purchased their shares
in exchange of his income by way of dividend and interest. This income was
transferred back to assessee by way of loan. The Court decided that the private
companies were a sham and the corporate veil was lifted to decide the real owner of
the income.
(3) To avoid a legal obligation: Where it was found that the sole purpose for the
formation of the company was to use it as a device to reduce the amount to be paid
by way of bonus to workmen, the Supreme Court upheld the piercing of the veil to
look at the real transaction (The Workmen Employed in Associated Rubber Industries
Limited, Bhavnagar vs. The Associated Rubber Industries Ltd., Bhavnagar and
another).

(4) Formation of subsidiaries to act as agents: A company may sometimes be regarded

as an agent or trustee of its members, or of another company, and may therefore be
deemed to have lost its individuality in favour of its principal. Here the
principal will be held liable for the acts of that company. In the case of
Merchandise Transport Limited vs. British Transport Commission (1982),
(5) Company formed for fraud/improper conduct or to defeat law: Where the device of
incorporation is adopted for some illegal or improper purpose, e.g., to defeat or
circumvent law, to defraud creditors or to avoid legal obligations. [Gilford Motor
Co. vs. Horne]

1. On the basis of liability:

(a) Company limited by shares: Section 2(22) of the Companies Act, 2013, defines
that when the liability of the members of a company is limited by its memorandum of
association to the amount (if any) unpaid on the shares held by them, it is known
as a company limited by shares. It thus implies that for meeting the debts of the
company, the shareholder may be called upon to contribute only to the extent of the
amount, which remains unpaid on his shareholdings. His separate property cannot be
encompassed to meet the company’s debt.
(b) Company limited by guarantee: Section 2(21) of the Companies Act, 2013 defines
it as the company having the liability of its members limited by the memorandum to
such amount as the members may respectively undertake by the memorandum to
contribute to the assets of the company in the event of its being wound up. Thus,
the liability of the member of a guarantee company is limited upto a stipulated sum
mentioned in the memorandum. Members cannot be called upon to contribute beyond
that stipulated sum.
The common features between a ‘guarantee company’ and ‘the company having share
capital’ are legal personality and limited liability. In the latter case, the
member’s liability is limited by the amount remaining unpaid on the share, which
each member holds. Both of them have to state in their memorandum that the members’
liability is limited.

However, the point of distinction between these two types of companies is that in
the
former case the members may be called upon to discharge their liability only after
commencement of the winding up and only subject to certain conditions; but in the
latter case, they may be called upon to do so at any time, either during the
company’s life-time or during its winding up.
It is clear from the definition of the guarantee company that it does not raise its
initial working funds from its members. Therefore, such a company may be useful
only where no working funds are needed or where these funds can be held from other
sources like endowment, fees, charges, donations, etc. In Narendra Kumar Agarwal
vs. Saroj Maloo, The Supreme Court has laid down that the right of a guarantee
company to refuse to accept the transfer by a member of his interest in the company
is on a different footing than that of a company limited by shares. The membership
of a guarantee company may carry privileges much different from those of ordinary
shareholders.
(c) Unlimited company: Section 2(92) of the Companies Act, 2013 defines unlimited
company as a company not having any limit on the liability of its members. In such
a company, the liability of a member ceases when he ceases to be a member. The
liability of each member extends to the whole amount of the company’s debts and
liabilities but he will be entitled to claim contribution from other members. In
case the company has share capital, the Articles of Association must state the
amount of share capital and the amount of each share. So long as the company is a
going concern the liability on the shares is the only liability which can be
enforced by the company.

2. On the basis of members:

(a) One person company: The Companies Act, 2013 introduced a new class of companies

which can be incorporated by a single person.

Section 2(62) of the Companies Act, 2013 defines one person company (OPC) as a
company which has only one person as a member.

According to section 3(1)(c) of the Companies Act, 2013, OPC is a private limited
company
with the minimum paid up share capital as may be prescribed and having one member.
OPC (One Person Company) - significant points
⬥ Only one person as member.
⬥ Minimum paid up capital – no limit prescribed.
⬥ The memorandum of OPC shall indicate the name of the other person, who shall, in
the event of the subscriber’s death or his incapacity to contract, become the
member of the company.
⬥ The other person whose name is given in the memorandum shall give his prior
written consent in prescribed form and the same shall be filed with Registrar of
companies at the time of incorporation of the company along with its e-memorandum
and e-articles.
⬥ Such other person may be given the right to withdraw his consent.
⬥ The member of OPC may at any time
change the name of such other person by giving notice to the company and the
company shall intimate the same to the Registrar.
⬥ Any such change in the name of the
person shall not be deemed to be an alteration of the memorandum.
⬥ Only a natural person who is an Indian citizen whether resident in India or
otherwise and has stayed in India for a period of not less than 120 days during the
immediately preceding financial year
• shall be eligible to incorporate a OPC;
• shall be a nominee for the sole member of a OPC.
⬥ No person shall be eligible to incorporate more than one OPC or become nominee in
more than one such company.
⬥ No minor shall become member or nominee of the OPC or can hold share with
beneficial interest.
⬥ Such Company cannot be incorporated or converted into a company under section 8
of the Act. Though it may be converted to private or public companies in certain
cases.
⬥ Such Company cannot carry out Non-Banking Financial Investment activities
including investment in securities of any body corporate.

(b) Private Company [Section 2(68)]: “Private company” means a company having a
minimum paid-up share capital as may be prescribed, and which by its articles,—
(i) restricts the right to transfer its shares;(ii) except in case of One Person
Company, limits the number of its members to two hundred:
Provided that where two or more persons hold one or more shares in a company
jointly, they shall, for the purposes of this clause, be treated as a single
member:
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were
members of the company while in that employment and have continued to be members
after the employment ceased, shall not be included in the number of members; and
(iii) prohibits any invitation to the public to subscribe for any securities of the
company;

Private company - significant points

⬥ No minimum paid-up capital requirement.
⬥ Minimum number of members – 2 (except if private company is an OPC, where it will
be 1).
⬥ Maximum number of members – 200, excluding present employee-cum-members and
erstwhile employee-cum-members.
⬥ Right to transfer shares restricted.
⬥Prohibition on invitation to subscribe to securities of the company.
⬥ Small company is a private company.
⬥ OPC can be formed only as a private company.
Small Company: Small company given under the Section 2(85) of the Companies Act,
2013 which means a company, other than a public company—
(i) paid-up share capital of which does not exceed 4 crores rupees or such higher
amount as may be prescribed which shall not be more than ten crore rupees; and
(ii) turnover of which as per profit and loss account for the immediately preceding
financial year does not exceed 40 crore rupees or such higher amount as may be
prescribed which shall not be more than one hundred crore rupees:
Exceptions: This clause shall not apply to:(A) a holding company or a subsidiary
company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act.6
Small Company –significant points
⬥ A private company
⬥ Paid up capital – not more than ` 50 lakhs Or Turnover – not more than ` 2
crores.
⬥ Should not be – Section 8 company – Holding or a Subsidiary company

(c) Public company [Section 2(71)]: “Public company” means a company which—
(i) is not a private company; and
(ii) has a minimum paid-up share capital, as may be prescribed:
Provided that a company which is a subsidiary of a company, not being a private
company, shall be deemed to be public company for the purposes of this Act even
where such subsidiary company continues to be a private company in its articles;
Public company - significant points
⬥ Is not a private company (Articles do not have the restricting clauses).
⬥ Shares freely transferable.
⬥ No minimum paid up capital requirement.
⬥ Minimum number of members – 7.
⬥ Maximum numbers of members – No limit.
⬥ Subsidiary of a public company is deemed to be a public company.
According to section 3(1)(a), a company may be formed for any lawful purpose by
seven or
more persons, where the company to be formed is to be a public company.
3. On the basis of control:
(a) Holding and subsidiary companies: ‘Holding and subsidiary’ companies are
relative
terms.
A company is a holding company in relation to one or more other companies, means
a company of which such companies are subsidiary companies. [Section 2(46)]
For the purposes of this clause, the expression “company" includes any body
corporate.
Whereas section 2(87) defines “subsidiary company” in relation to any other company

(that is to say the holding company), means a company in which the holding
company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power either at
its
own or together with one or more of its subsidiary companies.

For the purposes of this section —

(I) a company shall be deemed to be a subsidiary company of the holding company
even if the control referred to in sub-clause (i) or sub-clause (ii) is of another
subsidiary company of the holding company;
(II) the composition of a company’s Board of Directors shall be deemed to be
controlled by another company if that other company by exercise of some
power exercisable by it at its discretion can appoint or remove all or a majority
of the directors;

Status of private company, which is subsidiary to public company: In view of

Section 2(71) of the Companies Act, 2013 a Private company, which is subsidiary of
a public company shall be deemed to be public company for the purpose of this Act,
even where such subsidiary company continues to be a private company in its
articles.
(b) Associate company [Section 2(6)]: In relation to another company, means a
company in which that other company has a significant influence, but which is not a
subsidiary company of the company having such influence and includes a joint
venture company. Explanation. — For the purpose of this clause —
(a) the expression “significant influence” means control of at least twenty per
cent of total voting power, or control of or participation in business decisions
under an agreement;
(b) the expression ”joint venture’’ means a joint arrangement whereby the parties
that have joint control of the arrangement have rights to the net assets of the
arrangement.

4. On the basis of access to capital:

(a) Listed company: As per the definition given in the section 2(52) of the
Companies Act, 2013, it is a company which has any of its securities listed on any
recognised stock exchange. Provided that such class of companies, which have listed
or intend to list such class of securities, as may be prescribed in consultation
with the Securities and Exchange Board, shall not be considered as listed
companies. Whereas the word securities as per the section 2(81) of the Companies
Act, 2013 has been assigned the same meaning as defined in clause (h) of section 2
of the Securities Contracts (Regulation) Act, 1956.
(b) Unlisted company means company other than listed company.
5. Other companies:
(a) Government company [Section 2(45)]: Government Company means any company in
which not less than 51% of the paid-up share capital is held by-
(i) the Central Government, or (ii) by any State Government or Governments, or
(iii) partly by the Central Government and partly by one or more State Governments,
and the section includes a company which is a subsidiary company of such a
Government company. Explanation: For the purposes of this clause, the “paid up
share capital” shall be construed as “total voting power”, where shares with
differential voting rights have been issued.

(b) Foreign Company [Section 2(42)]: It means any company or body corporate
incorporated outside India which—
(i) has a place of business in India whether by itself or through an agent,
physically or through electronic mode; and
(ii) conducts any business activity in India in any other manner.
(c) Formation of companies with charitable objects etc. (Section 8 company):
Section 8 of the Companies Act, 2013 deals with the formation of companies which
are formed to
• promote the charitable objects of commerce, art, science, sports, education,
research, social welfare, religion, charity, protection of environment etc.
• Such company intends to apply its profit in
• promoting its objects and
• prohibiting the payment of any dividend to its members.
Power of Central government to issue the license–
(i) Section 8 allows the Central Government to register such person or association
of persons as a company with limited liability without the addition of words
‘Limited’ or ‘Private limited’ to its name, by issuing licence on such conditions
as it deems fit.
(ii) The registrar shall on application register such person or association of
persons as a company under this section.
(iii) On registration the company shall enjoy same privileges and obligations as of
a limited company.
Revocation of license: The Central Government may by order revoke the licence of
the company where the company contravenes any of the requirements or the conditions
of this sections subject to which a licence is issued or where the affairs of the
company are conducted fraudulently, or violative of the objects of the company or
prejudicial to public interest, and on revocation the Registrar shall put ‘Limited’
or ‘Private Limited’ against the company’s name in the register. But before such
revocation, the Central Government must give it a written notice of its intention
to revoke the licence and opportunity to be heard in the matter. Order of the
Central Government: Where a licence is revoked then the Central Government may, in
the public interest order that the company registered under this section should be
amalgamated with another company registered under this section having similar
objects, to form a single company with such constitution, properties, powers,
rights, interest, authorities and privileges and with such liabilities, duties and
obligations as may be specified in the order, or the company be wound up.
Penalty/punishment in contravention: If a company makes any default in complying
with any of the requirements laid down in this section, the company shall, without
prejudice to any other action under the provisions of this section, be punishable
with fine which shall not be less than ten lakh rupees but which may extend to one
crore rupees and the directors and every officer of the company who is in default
shall be punishable with fine which shall not be less than twenty-five thousand
rupees but which may extend to twenty-five lakh rupees.
Provided that when it is proved that the affairs of the company were conducted
fraudulently, every officer in default shall be liable for action under section
447.
Section 8 Company- Significant points
⬥ Formed for the promotion of commerce, art, science, religion, charity, protection
of environment, sports, etc.
⬥ Requirement of minimum share capital does not apply.
⬥ Uses its profits for the promotion of the objective for which it is formed.
⬥ Does not declare dividend to members.
⬥ Operates under a special licence from Central Government.
⬥ Need not use the word Ltd./ Pvt. Ltd. in its name and adopt a more suitable name
such as club, chambers of commerce etc.
⬥ Licence revoked if conditions contravened.
⬥ On revocation, Central Government may direct it to
– Converts its status and change its name
– Wind – up
– Amalgamate with another company having similar object.
⬥ Can call its general meeting by giving a clear 14 days’ notice instead of 21
days.
⬥ Requirement of minimum number of directors, independent directors etc. does not
apply.
⬥ Need not constitute Nomination and Remuneration Committee and Shareholders
Relationship Committee.
⬥ A partnership firm can be a member of Section 8 company.
(d) Dormant company (Section 455): Where a company is formed and registered under
this Act for a future project or to hold an asset or intellectual property and has
no significant accounting transaction, such a company or an inactive company may
make an application to the Registrar in such manner as may be prescribed for
obtaining the status of a dormant company. “Inactive company” means a company which
has not been carrying on any business or operation, or has not made any significant
accounting transaction during the last two financial years, or has not filed
financial statements and annual returns during the last two financial years.
“Significant accounting transaction” means any transaction other than—
(i) payment of fees by a company to the Registrar;
(ii) payments made by it to fulfil the requirements of this Act or any other law;
(iii) allotment of shares to fulfil the requirements of this Act; and
(iv) payments for maintenance of its office and records.

MODE OF REGISTRATION INCORPORATION OF COMPANY

PROMOTERS: The Companies Act, 2013 defines the term “Promoter” under section 2(69)
which means a person—
(a) who has been named as such in a prospectus or is identified by the company in
the annual return referred to in section 92; 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.

FORMATION OF COMPANY: Section 3 of the Companies Act, 2013 deals with the basic
requirement with respect to the constitution of the company. In the case of a
public company, any 7 or more persons can form a company for any lawful purpose by
subscribing their names to memorandum and complying with the requirements of this
Act in respect of registration. In the same way, 2 or more persons can form a
private company and one person can form one person company.
INCORPORATION OF COMPANY: Section 7 of the Companies Act, 2013 provides for the
procedure to be followed for incorporation of a company.

(1) Filing of the documents and information with the registrar: For the
registration of the company following documents and information are required to be
filed with the registrar within whose jurisdiction the registered office of the
company is proposed to be situated-
⬥ the memorandum and articles of the company duly signed by all the
subscribers to the memorandum.
⬥ a declaration by person who is engaged in the formation of the company (an
advocate, a chartered accountant, cost accountant or company secretary in
practice), and by a person named in the articles (director, manager or secretary of
the company), that all the requirements of this Act and the rules made thereunder
in respect of registration and matters precedent or incidental thereto have been
complied with.
⬥ a declaration from each of the subscribers to the memorandum and from persons
named as the first directors, if any, in the articles stating that-
➢ he is not convicted of any offence in connection with the promotion, formation or
management of any company, or he has not been found guilty of any fraud or
misfeasance or of any
breach of duty to any company under this Act or any previous company law during the
last five years,
➢ and that all the documents filed with the Registrar for registration of the
company contain information that is correct and complete and true to
the best of his knowledge and belief;
⬥ the address for correspondence till its registered office is established;
⬥ the particulars (names, including surnames or family names, residential
address, nationality) of every subscriber to the memorandum along with proof
of identity, and in the case of a subscriber being a body corporate, such
particulars as may be prescribed.
⬥ the particulars (names, including surnames or family names, the Director
Identification Number, residential address, nationality) of the persons
mentioned in the articles as the subscribers to the Memorandum and such other
particulars including proof of identity as may be prescribed; and
⬥ the particulars of the interests of the persons mentioned in the articles as
the first directors of the company in other firms or bodies corporate along with
their consent to act as directors of the company in such form and manner as may be
prescribed.
(2) Issue of certificate of incorporation on registration: The Registrar on the
basis of documents and information filed, shall register all the documents and
information in the register and issue a certificate of incorporation in the
prescribed form to the effect that the proposed company is incorporated under this
Act.
(3) Allotment of Corporate Identity Number (CIN): On and from the date mentioned in
the certificate of incorporation, the Registrar shall allot to the company a
corporate identity number, which shall be a distinct identity for the company and
which shall also be included in the certificate.
(4) Maintenance of copies of all documents and information: The company shall
maintain and preserve at its registered office copies of all documents and
information as originally filed, till its dissolution under this Act.
(5) Furnishing of false or incorrect information or suppression of material fact at
the time of incorporation (i.e. at the time of Incorporation): If any person
furnishes any false or incorrect particulars of any information or suppresses any
material information, of which he is aware in any of the documents filed with the
Registrar in relation to the registration of a company, he shall be liable for
action for fraud under section 447.
(6) Company already incorporated by furnishing any false or incorrect information
or representation or by suppressing any material fact (i.e. post Incorporation):
Where, at any time after the incorporation of a company, it is proved that the
company has been got incorporated by furnishing any false or incorrect information
or
representation or by suppressing any material fact or information in any of the
documents or declaration filed or made for incorporating such company, or by any
fraudulent action, the promoters, the persons named as the first directors of the
company and the persons making declaration under this section shall each be liable
for action for fraud under section 447.
(7) Order of the Tribunal: Where a company has been got incorporated by furnishing
false or incorrect information or representation or by suppressing any material
fact or information in any of the documents or declaration filed or made for
incorporating such company or by any fraudulent action, the Tribunal may, on an
application made to it, on being satisfied that the situation so warrants,—
(a) pass such orders, as it may think fit, for regulation of the management of the
company including changes, if any, in its memorandum and articles, in public
interest or in the interest of the company and its members and creditors; or
(b) direct that liability of the members shall be unlimited; or
(c) direct removal of the name of the company from the register of companies; or
(d) pass an order for the winding up of the company; or
(e) pass such other orders as it may deem fit:
Provided that before making any order,—
⬥ the company shall be given a reasonable opportunity of being heard in the matter;
and
⬥ the Tribunal shall take into consideration the transactions entered into by the
company, including the obligations, if any, contracted or payment of any liability.
(a) Nominal or authorised or registered capital: This form of capital has been
defined in section 2(8) of the Companies Act, 2013. “Authorised capital” or
“Nominal capital” means such capital as is authorised by the memorandum of a
company to be the maximum amount of share capital of the company. Thus, it is the
sum stated in the memorandum as the capital of the company with which it is to be
registered being the

maximum amount which it is authorised to raise by issuing shares, and upon which it

pays the stamp duty. It is usually fixed at the amount, which, it is estimated, the

company will need, including the working capital and reserve capital, if any.
(b) Issued capital: Section 2(50) of the Companies Act, 2013 defines “issued
capital” which
means such capital as the company issues from time to time for subscription. It is
that part of authorised capital which is offered by the company for subscription
and includes the shares allotted for consideration other than cash. Schedule III to
the Companies Act, 2013, makes it obligatory for a company to disclose its issued
capital in the balance sheet.
(c) Subscribed capital: Section 2(86) of the Companies Act, 2013 defines
“subscribed
capital” as such part of the capital which is for the time being subscribed by the
members of a company.
(d) Called-up capital: Section 2(15) of the Companies Act, 2013 defines “called-up
capital” as such part of the capital, which has been called for payment. It is the
total amount called up on the shares issued.
(e) Paid-up capital is the total amount paid or credited as paid up on shares
issued. It is equal to called up capital less calls in arrears.
6. SHARES
(I) Nature of shares: Section 2(84) of the Companies Act, 2013 defines the term
‘share’ which means a share in the share capital of a company and includes stock. A
share thus represents such proportion of the interest of the shareholders as the
amount paid up thereon bears to the total capital payable to the company. It is a
measure of the interest in the company’s assets to which a person holding a share
is entitled. Share is an interest in the company:

Shares are a movable property: According to section 44 of the Companies Act, 2013,
the shares or debentures or other interests of any member in a company shall be
movable property transferable in the manner provided by the articles of the
company. Shares shall be numbered: Section 45 provides, every share in a company
having a share capital, shall be distinguished by its distinctive number. This
implies that every share shall be numbered. However, this shall not apply to a
share held by a person whose name is entered as holder of beneficial interest in
such share in the records of a depository.
(II) Kinds of share capital:- Section 43 of the Companies Act, 2013 provides the
kinds of share capital. According to the provision the share capital of a company
limited by shares shall be of two kinds, namely:—
(i) Equity share capital —
(1) with voting rights; or
(2) with differential rights as to dividend, voting or otherwise in accordance with
prescribed rules;

(ii) Preference share capital: However, this Act shall not affect the rights of the
preference shareholders who are entitled to participate in the proceeds of winding
up before the commencement of this Act.

According to explanation to section 43:

1. ‘‘Equity share capital’’, with reference to any company limited by shares, means
all share capital which is not preference share capital;
2. ‘‘Preference share capital’’, with reference to any company limited by shares,
means that part of the issued share capital of the company which carries or would
carry a preferential right with respect to— (a) payment of dividend, either as a
fixed amount or an amount calculated at a fixed rate, which may either be free of
or subject to income-tax; and
(b) repayment, in the case of a winding up or repayment of capital, of the amount
of the share capital paid-up or deemed to have been paid-up, whether or not, there
is a preferential right to the payment of any fixed premium or premium on any fixed
scale, specified in the memorandum or articles of the company;
Exception: In case of private company - Section 43 shall not apply where memorandum
or articles of association of the private company so provides.
7. MEMORANDUM OF ASSOCIATION
The Memorandum of Association of company is in fact its charter; it defines its
constitution and the scope of the powers of the company with which it has been
established under the Act. It is the very foundation on which the whole edifice of
the company is built. Object of registering a memorandum of association:
⬥ It contains the object for which the company is formed and therefore identifies
the possible scope of its operations beyond which its actions cannot go.
⬥ It enables shareholders, creditors and all those who deal with company to know
what its powers are and what activities it can engage in.
A memorandum is a public document under Section 399 of the Companies Act, 2013.
Consequently, every person entering into a contract with the company is presumed to
have the knowledge of the conditions contained therein.
⬥ The shareholders must know the purposes for which his money can be used by the
company and what risks he is taking in making the investment. A company cannot
depart from the provisions contained in the memorandum however imperative may be
the necessity for the departure. It cannot enter into a contract or engage in any
trade or business, which is beyond the power confessed on it by the memorandum. If
it does so, it would be ultra vires the company and void.

Content of the memorandum: The memorandum of a company shall state—

(a) the name of the company (Name Clause) with the last word “Limited” in the case
of a public limited company, or the last words “Private Limited” in the case of a
private limited company. This clause is not applicable on the companies formed
under section 8 of the Act.
For the Companies under section 8 of the Act, the name shall include the words
foundation, Forum, Association. In the case of One Person Company, the words “One
Person Company”, should be included below its name.
(b) the State in which the registered office of the company (Registered Office
clause) is to be situated;
(c) the objects for which the company is proposed to be incorporated and any matter
considered necessary in furtherance thereof (Object clause); If any company has
changed its activities which are not reflected in its name, it shall change its
name in line with its activities within a period of six months from the change of
activities after complying with all the provisions as applicable to change of name.
(d) the liability of members of the company (Liability clause), whether limited or
unlimited, and also state,—
• in the case of a company limited by shares, that the liability of its members is
limited to the amount unpaid, if any, on the shares held by them; and
• in the case of a company limited by guarantee, the amount up to which each member
undertakes to contribute—
➢ to the assets of the company in the event of its being wound-upwhile he is a
member or within one year after he ceases to be a member for payment of the debts
and liabilities of the company or of such debts and liabilities as may have been
contracted before he ceases to be a member, as the case may be; and
➢ to the costs, charges and expenses of winding-up and for adjustment of the rights
of the contributories among themselves;
(e) the amount of authorized capital (Capital Clause) divided into share of fixed
amounts and the number of shares with the subscribers to the memorandum have agreed
to take, indicated opposite their names, which shall not be less than one share. A
company not having share capital need not have this clause.
(f) the detail of the subscribers to be formed into a company. The Memorandum shall
conclude with the association clause. Every subscriber to the Memorandum shall take
atleast one share, and shall write against his name, the number of shares taken by
him.
In the case of OPC, the name of the person who, in the event of death of the
subscriber, shall become the member of the company.

Doctrine of ultra vires: The meaning of the term ultra vires is simply “beyond
(their) powers”. The legal phrase “ultra vires” is applicable only to acts done in
excess of the legal powers of the doers. This presupposes that the powers in their
nature are limited. It is a fundamental rule of Company Law that the objects of a
company as stated in its memorandum can be departed from only to the extent
permitted by the Act, thus far and no further. In consequence, any act done or a
contract made by the company which travels beyond the powers not only of the
directors but also of the company is wholly void and inoperative in law and is
therefore not binding on the company. On this account, a company can be restrained
from employing its fund for purposes other than those sanctioned by the memorandum.
Likewise, it can be restrained from carrying on a trade different from the one it
is authorised to carry on. The impact of the doctrine of ultra vires is that a
company can neither be sued on an ultra vires transaction, nor can it sue on it.
Since the memorandum is a “public document”, it is open to public inspection.
Therefore, when one deals with a company one is deemed to know about the powers of
the company. If in spite of this you enter into a transaction which is ultra vires
the company, you cannot enforce it against the company.

An act which is ultra vires the company being void, cannot be ratified by the
shareholders of the company. Sometimes, act which is ultra vires can be regularised
by ratifying it subsequently. For instance, if the act is ultra vires the power of
the directors, the shareholders can ratify it; if it is ultra vires the articles of
the company, the company can alter the articles; if the act is within the power of
the company but is done irregularly, shareholder can validate it. The leading case
through which this doctrine was enunciated is that of Ashbury Railway Carriage and
Iron Company Limited v. Riche-(1875).

An ultra vires contract can never be made binding on the company. It cannot become
“Intravires” by reasons of estoppel, acquiescence, Iapse of time, delay or
ratification.

The whole position regarding the doctrine of ultra vires can be summed up as:
(i) When an act is performed, which though legal in itself, is not authorized by
the object clause of the memorandum, or by the statute, it is said to be ultravires
the company, and hence null and void.
(ii) An act which is ultravires, the company cannot be ratified even by the
unanimous consent of all the shareholders.
(iii) An act which is ultravires the directors, but intravires the company can be
ratified by the members of the company through a resolution passed at a general
meeting.
(iv) If an act is ultravires the Articles, it can be ratified by altering the
Articles by a Special Resolution at a general meeting. However, the disadvantages
of this doctrine outweigh its main advantage, namely to provide protection to the
shareholders and creditors. Although it may be useful to members in restraining the
activities of the directors, it is only a nuisance in so far as it prevents the
company from changing its activities in a direction which is agreed by all.

articles of association

The articles of association of a company are its rules and regulations, which are
framed to manage its internal affairs. Just as the memorandum contains the
fundamental conditions upon which the company is allowed to be incorporated, so
also the articles are the internal regulations of the company . These general
functions of the articles have been aptly summed up by Lord Cairns in Ashbury
Carriage Co. vs. Riches as follows: “The articles play a part subsidiary to
memorandum of association. They accept the memorandum as the charter of
incorporation, and so accepting it the articles proceed to define the duties, the
rights and powers of the governing body as between themselves and the company and
the mode and form in which the business of the company is to be carried on, and the
mode and form in which changes in the internal regulation of the company may from
time to time be made.”
The articles of association are in fact the bye-laws of the company according to
which director and other officers are required to perform their functions as
regards the management of the company, account and audit.

Section 5 of the Companies Act, 2013 seeks to provide the contents and model of
articles of association. The section lays the following law-
(1) Contains regulations: The articles of a company shall contain the regulations
for management of the company.
(2) Inclusion of matters: The articles shall also contain such matters, as are
prescribed under the rules. However, a company may also include such additional
matters in its articles as may be considered necessary for its management.
(3) Contain provisions for entrenchment: The articles may contain provisions for
entrenchment (to protect something) to the effect that specified provisions of the
articles may be altered only if conditions or procedures as that are more
restrictive than those applicable in the case of a special resolution, are met or
complied with.
(4) Manner of inclusion of the entrenchment provision: The provisions for
entrenchment shall only be made either on formation of a company, or by an
amendment in the articles agreed to by all the members of the company in the case
of a private company and by a special resolution in the case of a public company.
(5) Notice to the registrar of the entrenchment provision: Where the articles
contain provisions for entrenchment, whether made on formation or by amendment, the
company shall give notice to the Registrar of such provisions in such form and
manner as may be prescribed.
(6) Forms of articles: The articles of a company shall be in respective forms
specified in Tables, F, G, H, I and J in Schedule I as may be applicable to such
company.
(7) Model articles: A company may adopt all or any of the regulations contained in
the model articles applicable to such company.
(8) Company registered after the commencement of this Act: In case of any company,
which is registered after the commencement of this Act, in so far as the registered
articles of such company do not exclude or modify the regulations contained in the
model articles applicable to such company, those regulations shall, so far as
applicable.

The following are the key differences between the Memorandum of Association vs.
Articles of Association:
1. Objectives: Memorandum of Association defines and delimits the objectives of the
company whereas the Articles of association lays down the rules and regulations for
the internal management of the company. Articles determine how the objectives of
the company are to be achieved.
2. Relationship: Memorandum defines the relationship of the company with the
outside world and Articles define the relationship between the company and its
members.
3. Alteration: Memorandum of association can be altered only under certain
circumstances and in the manner provided for in the Act. In most cases permission
of
the Regional Director, or the Tribunal is required. The articles can be altered
simply by passing a special resolution.
4. Ultra Vires: Acts done by the company beyond the scope of the memorandum are
ultra-vires and void. These cannot be ratified even by the unanimous consent of all
the shareholders. The acts ultra-vires the articles can be ratified by a special
resolution of the shareholders, provided they are not beyond the provisions of the
memorandum.
10. DOCTRINE OF INDOOR MANAGEMENT
Doctrine of Constructive Notice: Section 399 of the Companies Act, 2013 provides
that any person can inspect by electronic means any document kept by the Registrar,
or make a record of the same, or get a copy or extracts of any document, including
certificate of incorporation of any company, on payment of prescribed fees.
The memorandum and articles of association of a company when registered with
Registrar of Companies, become public documents, and they are available for
inspection to any person, on the payment of a nominal fees. In other words, Section
399 confers the right of inspection to all. It is therefore, the duty of every
person dealing with a company to inspect its documents and make sure that his
contract is in conformity with their provisions but whether a person reads them or
not, it will be presumed that he knows the contents of the documents. This kind of
presumed/implied notice is called constructive notice.
By constructive notice is meant:
(i) Whether a person reads the documents or not, he is presumed to have knowledge
of the contents of the documents. He is not only presumed to have read the
documents but also understood them in their true perspective, and
(ii) Every person dealing with the company not only has the constructive notice of
the memorandum and articles, but also of all the other related documents, such as
Special Resolutions etc., which are required to be registered with the Registrar.
Thus, if a person enters into a contract which is beyond the powers of the company
as defined in the memorandum, or outside the authority of directors as per
memorandum or articles, he cannot acquire any rights under the contract against the
company.

Doctrine of Indoor Management: The Doctrine of Indoor Management is the exception

to the doctrine of constructive notice. The aforesaid doctrine of constructive
notice does in no sense mean that outsiders are deemed to have notice of the
internal affairs of the company. For instance, if an act is authorised by the
articles or memorandum, an outsider is entitled to assume that all the detailed
formalities for doing that act have been observed. This can be explained with the
help of a landmark case The Royal British Bank vs. Turquand. This is the doctrine
of indoor management popularly known as Turquand Rule.
FACTS of the Royal British Bank vs. Turquand

Exceptions to the doctrine of Indoor Management:

(a) Actual or constructive knowledge of irregularity: The rule does not protect any
person when the person dealing with the company has notice, whether actual or
constructive, of the irregularity.
Howard vs. Patent Ivory Manufacturing Co.
(b) Suspicion of Irregularity: The doctrine in no way, rewards those who behave
negligently. Where the person dealing with the company is put upon an inquiry, for
The protection of the “Turquand Rule” is also not available where the circumstances
surrounding the contract are suspicious and therefore invite inquiry. Suspicion
should arise,
Anand Bihari Lal vs. Dinshaw & Co.

(c) Forgery: The doctrine of indoor management applies only to irregularities which
might otherwise affect a transaction but it cannot apply to forgery which must be
regarded as nullity.
Forgery may in circumstances exclude the ‘Turquand Rule’. The only clear
illustration
is found in the Ruben v Great Fingall Consolidated.