The Companies Act, 2013 provides for the kinds of companies that can be promoted and registered under the Act. The three basic types of companies which may be registered under the Act are:
- Private Companies;
- Public Companies; and
- One Person Company (to be formed as Private Limited).
Section 3 (1) of the Companies Act 2013 states that 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;
- two or more persons, where the company to be formed is to be a private company; or
- one person, where the company to be formed is to be One Person Company, that is to say, a private company, by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration
(2) A company formed under sub-section (1) may be either—
- a company limited by shares; or
- a company limited by guarantee; or
- an unlimited company.
Classification of Companies
Classification on the basis of Incorporation
There are three ways in which companies may be incorporated.
(a) Statutory Companies: These are constituted by a special Act of Parliament or State Legislature. The provisions of the Companies Act, 2013 do not apply to them. Examples of these types of companies are Reserve Bank of India, Life Insurance Corporation of India, etc.
(b) Registered Companies: The companies which are incorporated under the Companies Act, 2013 or under any previous company law, with ROC fall under this category.
Classification on the basis of Liability
Under this category there are three types of companies:
(a) Unlimited Liability Companies: In this type of company, the members are liable for the company’s debts in proportion to their respective interests in the company and their liability is unlimited. Such companies may or may not have share capital. They may be either a public company or a private company.
(b) Companies limited by guarantee: A company that has the liability of its members limited 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, is known as a company limited by guarantee. The members of a guarantee company are, in effect, placed in the position of guarantors of the company’s debts up to the agreed amount.
(c) Companies limited by shares: A company that has the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them is termed as a company limited by shares. For example, a shareholder who has paid `75 on a share of face value ` 100 can be called upon to pay the balance of `25 only. Companies limited by shares are by far the most common and may be either public or private.
Other Forms of Companies
(a) Associations not for profit having a license under Section 8 of the Companies Act, 2013 or under any previous company law;
(b) Government Companies;
(c) Foreign Companies;
(d) Holding and Subsidiary Companies;
(e) Associate Companies/Joint Venture Companies
(f) Investment Companies
(g) Producer Companies.
(h) Dormant Companies
As per Section 2(68) of the Companies Act, 2013, “private company” means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles,—
- restricts the right to transfer its shares;
- except in the 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 definition, be treated as a single member:
Provided further that the following persons shall not be included in the number of members;—
(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, and
(iii) prohibits any invitation to the public to subscribe for any securities of the company; It must be noted that it is only the number of members that is limited to two hundred. A private company may issue debentures to any number of persons, the only condition being that an invitation to the public to subscribe for debentures is prohibited.
The aforesaid definition of private limited company specifies the restrictions, limitations and prohibitions, which must be expressly provided in the articles of association of a private limited company.
As per proviso to Section 14 (1), if a company being a private company alters its articles in such a manner that they no longer include the restrictions and limitations which are required to be included in the articles of a private company under this Act, such company shall, as from the date of such alteration, cease to be a private company. A private company can only accept deposit from its members in accordance with section 73 of the Companies Act, 2013.
The words ‘Private Limited’ must be added at the end of its name by a private limited company. As per section 3 (1), a private company may be formed for any lawful purpose by two or more persons, by subscribing their names to a memorandum and complying with the requirements of this Act in respect of registration. Section 149(1) further lays down that a private company shall have a minimum number of two directors. The only two members may also be the two directors of the private company.
ONE PERSON COMPANY (OPC)
Background of OPC
With the implementation of the Companies Act, 2013, a single person could constitute a Company, under the One Person Company (OPC) concept.
The new Companies Act, 2013 has done away with redundant provisions of the previous Companies Act,1956, and provides for a new entity in the form of one person company (OPC), while empowering the Central Government to provide a simpler compliance regime for small companies.
The introduction of OPC in the legal system is a move that would encourage the corporatisation of microbusinesses and entrepreneurship.
In India, in the year 2005, the JJ Irani Expert Committee recommended the formation of OPC. It had suggested that such an entity may be provided with a simpler legal regime through exemptions so that the small entrepreneur is not compelled to devote considerable time, energy and resources on complex legal compliance. OPC is a one shareholder corporate entity, where legal and financial liability is limited to the company only.
Difference between a Sole Proprietorship and an OPC
The fundamental difference between a sole proprietorship and an OPC is the way liability is treated in the latter.
A one-person company is different from a sole proprietorship because it is a separate legal entity that distinguishes between the promoter and the company.
The promoter’s liability is limited in an OPC in the event of a default or legal issues. On the other hand, in sole proprietorships, the liability is not restricted and extends to the individual and his or her entire assets.
Position of OPC in India under the Companies Act, 2013
The Companies Act, 2013 classifies companies on the basis of their number of members into One Person Company, private company and public company. As stated above, a private company requires a minimum of 2 members. In other words, a One Person Company is a kind of private company having only one member.
As per section 2(62) of the Companies Act, 2013, “One Person Company” means a company which has only one person as a member.
Section 3(1)(c) lays down that a company may be formed for any lawful purpose by one person, where the company to be formed is to be One Person Company that is to say, a private company. In other words, one person company is a kind of private company.
One person company shall have a minimum of one director. Therefore, a One Person Company will be registered as a private company with one member and one director.
By virtue of section 3(2), an OPC may be formed either as a company limited by shares or a company limited by guarantee; or an unlimited liability company.
Contract by One Person Company
Section 193 (1) provides that where One Person Company limited by shares or by guarantee enters into a contract with the sole member of the company who is also the director of the company, the company shall, unless the contract is in writing, ensure that the terms of the contract or offer are recorded in a memorandum or are recorded in the minutes of the first meeting of the Board of Directors of the company held next after entering into contract.
However, above said provision shall not apply to contracts entered into by the one person company in the ordinary course of its business.
As per section 193 (2), the company shall inform the Registrar about every contract entered into by the company and recorded in the minutes of the meeting of its Board of Directors under sub-section (1) within a period of fifteen days of the date of approval by the Board of Directors.
As per section 152 (1), in case of a One Person Company, an individual being its member shall be deemed to be its first director until a director or directors are duly appointed by the member in accordance with the provisions of that section.
Benefits of One Person Company
The concept of One person company is quite revolutionary. It gives the individual entrepreneurs all the benefits of a company, which means they will get credit, bank loans, access to the market, limited liability, and legal protection available to companies.
Prior to the new Companies Act, 2013 coming into effect, at least two shareholders were required to start a company. But now the concept of One Person Company (OPC) would provide tremendous opportunities for small businessmen and traders, including those working in areas like handloom, handicrafts and pottery.
Earlier they were working as artisans and weavers on their own, so they did not have a legal entity of a company. But now the OPC would help them do business as an enterprise and give them an opportunity to start their own ventures with a formal business structure,
Further, the amount of compliance by a one-person company is much lesser in terms of filing returns, balance sheets, audit etc. Also, rather than the middlemen usurping profits, the one person company will have direct access to the market and the wholesale retailers. The new concept would also boost the confidence of small entrepreneurs.
As recommended by the Dr JJ Irani Committee, the concept of small companies has been introduced in the Companies, Act, 2013. The recommendation of the Irani committee in this regard was as under:
“The Committee sees no reason why small companies should suffer the consequences of regulation that may be designed to ensure balancing of interests of stakeholders of large, widely held corporates. Company law should enable simplified decision-making procedures by relieving such companies from select statutory internal administrative procedures. Such companies should also be subjected to reduced financial reporting and audit requirements and simplified capital maintenance regimes. Essentially the regime for small companies should enable them to achieve transparency at a low cost through simplified requirements. Such a framework may be applied to small companies through exemptions, consolidated in the form of a Schedule to the Act.”
A small company is a new form of a private company under the Companies Act, 2013. A classification of a private company into a small company is based on its size i.e. paid-up capital and turnover. In other words, such companies are small sized private companies.
As per section 2(85) ‘‘small company’’ means a company, other than a public company,—
(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; or
(ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:
Provided that nothing in this definition shall 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;
By virtue of Section 2(71), a public company means a company which:
(a) is not a private company;
(b) has a minimum paid-up share capital of five lakh rupees or such higher paid-up 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 a public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles
As per section 3 (1) (a), a public company may be formed for any lawful purpose by seven or more persons, by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration.
A public company may be said to be an association consisting of not less than 7 members, which is registered under the Act. In principle, any member of the public who is willing to pay the price may acquire shares in or debentures of it. The securities of a public company may be quoted on a Stock Exchange. The number of members is not limited to two hundred. It may be noted that in the case of a public company, the articles do not contain the restrictions provided in Sections 2(68) of the Act.
As per section 58(2), the securities or other interest of any member in a public company shall be freely transferable. However, any contract or arrangement between two or more persons in respect of the transfer of securities shall be enforceable as a contract.
The concept of free transferability of shares in public and private companies is very succinctly discussed in the case of Western Maharashtra Development Corpn. Ltd. V. Bajaj Auto Ltd  154 Com Cases 593 (Bom). It was held that the Companies Act, makes a clear distinction in regard to the transferability of shares relating to private and public companies. By definition, a “private company” is a company which restricts the right to transfer its shares. In the case of a public company, the Act provides that the shares or debentures and any interest therein, of a company, shall be freely transferable.
The provision contained in the law for the free transferability of shares in a public company is founded on the principle that members of the public must have the freedom to purchase and, every shareholder the freedom to transfer. The incorporation of a company in the public, as distinguished from the private, realm leads to specific consequences and the imposition of obligations envisaged in law. Those who promote and manage public companies assume those obligations. Corresponding to those obligations are rights, which the law recognizes as inherent in the members of the public who subscribe to shares.
As per section 3(2), a company formed under this Act may be either (a) a company limited by shares; or (b) a company limited by guarantee or (c) an unlimited company.
The term ‘Limited Company’ means a company limited by shares or by guarantee.
The liability of the members, in the case of a limited company, may be limited with reference to the nominal value of the shares, respectively held by them or to the amount which they have respectively guaranteed to contribute in the event of winding up of the company. Accordingly, a limited company can be further classified into: (a) Company limited by shares, and (b) Company limited by guarantee.
Companies Limited by Shares
As per section 2(22), “company limited by shares” means a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them.
Accordingly, no member of a company limited by shares, can be called upon to pay more than the nominal value of the shares held by him. If his shares are fully paid-up, he has nothing more to pay. But in the case of partly-paid shares, the unpaid portion is payable at any time during the existence of the company on a call being made, whether the company is a going concern or is being wound up. This is the essence of a company limited by shares and is the most common form in existence.
Companies Limited by Guarantee
As per section 2(21) “company limited by guarantee” means a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up. Clubs, trade associations and societies for promoting different objects are examples of such a company. It should be noted that a special feature of this type of company is that the liability of members to pay their guaranteed amounts arises only when the company has gone into liquidation and not when it is a going concern.
A guarantee company may or may not have a share capital.
As regards the funds, a guarantee company without share capital obtains working capital from other sources, e.g. fees or grants. But a guarantee company having a share capital raises its initial capital from its members, while the normal working funds would be provided from other sources, such as fees, charges, subscriptions, etc.
The Memorandum of Association of every guarantee company must state that every member of the company undertakes to contribute to assets of the company in the event of its being wound up while he is a member for the payment of the debts and liabilities of the company contracted before he ceases to be a member, and of the charges, costs and expenses of winding up, and for adjustment of the rights of the contributories among themselves, such amount as may be required, not exceeding a specified amount.
The Memorandum of a company limited by guarantee must state the amount of guarantee. It may be of different denominations.
In case of a guarantee company having share capital the shareholders have two-fold liability: to pay the amount which remains unpaid on their shares, whenever called upon to pay, and secondly, to pay the amount payable under the guarantee when the company goes into liquidation. The voting power of a guarantee company having share capital is determined by the shareholding and not by the guarantee. A guarantee company must include the word ‘limited” or the words “private limited” as part of its name, and must register its articles,and it shall adopt the provisions of the Table ‘G’ and ‘H’ of Schedule I. It must also state the number of members with which it proposes to be registered, although the number can be increased by means of a resolution.
Section 4(7) states that any provision in the memorandum of articles, in the case of company limited by guarantee and not having a share capital, purporting to give any person a right to participate in the divisible profits of the company otherwise than as a member shall be void.
As per section 2(92), “unlimited company” means a company not having any limit on the liability of its members. Thus, the maximum liability of the member of such a company, in the event of its being wound up, might stretch up to the full extent of their assets to meet the obligations of the company by contributing to its assets. However, the members of an unlimited company are not liable directly to the creditors of the company, as in the case of partners of a firm. The liability of the members is only towards the company and in the event of its being wound up only the Liquidator can ask the members to contribute to the assets of the company which will be used in the discharge of the debts of the company.
An unlimited company may or may not have share capital. Under Section 18, a company registered as an unlimited company may subsequently re-register itself as a limited company, by altering its memorandum and articles of the company in accordance with the provisions of Chapter II of the Companies Act subject to the provision that any debts, liabilities, obligations or contracts incurred or entered into, by or on behalf of the unlimited company before such conversion are not affected by such changed registration.
Section 2(45) defines a “Government Company” as any company in which not less than fifty one per cent. Of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company.
Notwithstanding all the pervasive control of the Government, the Government company is neither a Government department nor a Government establishment [Hindustan Steel Works Construction Co. Ltd. v. State of Kerala (1998) 2 CLJ 383].
Since employees of Government companies are not Government servants, they have no legal right to claim that the Government should pay their salary or that the additional expenditure incurred on account of revision of their pay scales should be met by the Government. It is the responsibility of the company to pay them the salaries [A.K. Bindal v. Union of India (2003) 114 Com Cases 590 (SC)].
When the Government engages itself in trading ventures, particularly as Government companies under the company law, it does not do so as a State but it does so in essence as a company. A Government company is not a department of the Government.
As per section 2(42), “foreign company” means any company or body corporate incorporated outside India which—
(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
(b) conducts any business activity in India in any other manner
Sections 379 to 393 of the Act deal with such companies. Section 380 of the Act lays down that every foreign company which establishes a place of business in India must, within 30 days of the establishment of such place of business, file with the Registrar of Companies for registration:
(a) a certified copy of the charter, statutes or memorandum and articles, of the company or other instrument constituting or defining the constitution of the company and, if the instrument is not in the English language, a certified translation thereof in the English language;
(b) the full address of the registered or principal office of the company;
(c) a list of the directors and secretary of the company containing such particulars as may be prescribed;
(d) the name and address or the names and addresses of one or more persons resident in India authorised to accept on behalf of the company service of process and any notices or other documents required to be served on the company;
(e) the full address of the office of the company in India which is deemed to be its principal place of business in India;
(f) particulars of opening and closing of a place of business in India on earlier occasion or occasions;
(g) declaration that none of the directors of the company or the authorised representative in India has ever been convicted or debarred from formation of companies and management in India or abroad; and
(h) any other information as may be prescribed.
Every foreign company has to ensure that the name of the company, the country of incorporation, the fact of limited liability of members is exhibited in the specified places or documents as required under Section 382.
Section 381 requires a Foreign Company to maintain books of Account and file a copy of the balance sheet and profit and loss account in the prescribed form with ROC every calendar year. These accounts should be accompanied by a list of place of business established by the foreign company in India.
Section 376 of the Companies Act, 2013 provides further that when a foreign company, which has been carrying on business in India, ceases to carry on such business in India, it may be wound up as an unregistered company under Sections 375 to 378 of the Act, even though the company has been dissolved or ceased to exist under the laws of the country in which it was incorporated.
HOLDING, SUBSIDIARY COMPANIES AND ASSOCIATE COMPANIES
On the basis of control, companies can be classified into holding, subsidiary and associate companies.
As per Section 2 (46), holding company, in relation to one or more other companies, means a company of which such companies are subsidiary companies.
Section 2 (87) provides that subsidiary company or subsidiary, 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 share capital either at its own or together with one or more of its subsidiary companies:
Provided that such class or classes of holding companies, shall not have layers of subsidiaries beyond the prescribed limit. (Proviso to be notified)
For the above purpose,—
(a) 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;
(b) the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by the exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;
(c) the expression “company” includes any body corporate;
As per Section 2(6), “Associate company”, 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 to section 2(6) provides that “significant influence” means control of at least twenty per cent. Of total share capital, or of business decisions under an agreement.
To add more governance and transparency in the working of the company, the concept of the associate company has been introduced. It will provide a more rational and objective framework of the associated relationship between the companies.
Further, as per section 2 (76), Related party includes ‘Associate Company’. Hence, contract with Associate Company will require disclosure/approval/entry in the statutory register as is applicable to contract with a related party.
As per explanation (a) to section 186, “investment company” means a company whose principal business is the acquisition of shares, debentures or other securities.
An investment company is a company, the principal business of which consists in acquiring, holding and dealing in shares and securities. The word ‘investment’, no doubt, suggests only the acquisition and holding of shares and securities and thereby earning income by way of interest or dividend etc. But investment companies in actual practice earn their income not only through the acquisition and holding but also by dealing in shares and securities i.e. to buy with a view to sell later on at higher prices and to sell with a view to buying later on at lower prices.
If a company is engaged in any other business to an appreciable extent, it will not be treated as an investment company. The following two sets of legal opinions are quoted below as to the meaning of an investment company:
(i) According to one set of legal opinion, an “investment company” means a company which acquires and holds shares and securities with an intent to earn income only from them by holding them. On the other hand, another school of legal opinion holds that “an Investment Company means a company, which acquires shares and securities for earning income by holding them as well as by dealing in such shares and other securities”.
(ii) According to Section 2(10A) of the Insurance Act, 1938, an investment company means a company whose principal business is the acquisition of shares, stocks, debentures or other securities.
Section 465(1) of the Companies Act, 2013 provides that the Companies Act, 1956 and the Registration of
Companies (Sikkim) Act, 1961 (hereafter in this section referred to as the repealed enactments) shall stand repealed.
However, the proviso to section 465(1) provides that the provisions of Part IX-A of the Companies Act, 1956 shall be applicable mutatis mutandis to a Producer Company in a manner as if the Companies Act, 1956 has not been repealed until a special Act is enacted for Producer Companies.
In view of the above provision, Producer Companies are still governed by the Companies Act, 1956. Companies (Amendment) Act, 2002 had added a new Part IXA to the main Companies Act, 1956 consisting of 46 new Sections from 581A to 581ZT.
According to the provisions as prescribed under Section 581A(l) of the Companies Act, 1956, a producer company is a body corporate having objects or activities specified in Section 581B and which is registered as such under the provisions of the Act. The membership of producer companies is open to such people who themselves are the primary producers, which is an activity by which some agricultural produce is produced by such primary producers.
Objects of Producer Companies
In terms of Section 581B(1) of the Companies Act, 1956, the objects of a producer company registered under this Act may be all or any of the following matters:
- production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of primary produce of the members or import of goods or services for their benefit.
- processing including preserving, drying, distilling, brewing, vinting, canning and packaging of the produce of its members.
- manufacturing, sale or supply of machinery, equipment or consumables mainly to its members.
- providing education on the mutual assistance principles to its members and others.
- rendering technical services, consultancy services, training, research and development and all other activities for the promotion of the interests of its members.
- generation, transmission and distribution of power, revitalisation of land and water resources, their use, conservation and communications relatable to primary produce.
- insurance of producers or their primary produce.
- promoting techniques of mutuality and mutual assistance.
- welfare measures or facilities for the benefit of the members as may be decided by the Board.
- any other activity, ancillary or incidental to any of the activities referred to in clauses (a) to (i) above or other activities which may promote the principles of mutuality and mutual assistance amongst the members in any other manner.
- financing of procurement, processing, marketing or other activities specified in clauses (a) to (j) above, which include extending of credit facilities or any other financial services to its members. Further, under Section 581B(2) it has also been clarified that every producer company shall deal primarily with the production of its active members for carrying out any of its objects specified above.
The Companies Act, 2013 has recognized a new set of companies called as dormant companies.
As per section 455 (1) 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.
Explanation appended to section 455(1) says that for the purposes of this section,—
(i) “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;
(ii) “significant accounting transaction” means any transaction other than—
(a) payment of fees by a company to the Registrar;
(b) payments made by it to fulfil the requirements of this Act or any other law;
(c) allotment of shares to fulfil the requirements of this Act; and
(d) payments for maintenance of its office and records.
As per section 455(2), the Registrar on consideration of the application shall allow the status of a dormant company to the applicant and issue a certificate in such form as may be prescribed to that effect.
Section 455(3) provides that the Registrar shall maintain a register of dormant companies in such form as may be prescribed.
According to section 455(4), in case of a company which has not filed financial statements or annual returns for two financial years consecutively, the Registrar shall issue a notice to that company and enter the name of such company in the register maintained for dormant companies.
Further, a dormant company shall have such minimum number of directors, file such documents and pay such annual fee as may be prescribed to the Registrar to retain its dormant status in the register and may become an active company on an application made in this behalf accompanied by such documents and fee as may be prescribed. [Section 455(5)]
By – Mayank Shekhar
Faculty of Law, DU
Disclaimer – This document is intended to provide information only. If you are seeking advice on any matters relating to information on this website, you should contact us directly with your specific query or seek advice from qualified professionals only. We have taken all reasonable measures to ensure the quality, reliability, and accuracy of the information in this document. However, we may have made mistakes and we will not be responsible for any loss or damage of any kind arising because of the usage of this information. Further, upon discovery of any error or omissions, we may delete, add to, or amend information on this website without notice.
Click Here to write your own Blog/Article on Legal Bites.
We hope you found this useful. Support us by Sharing Your Knowledge or any information. Every contribution toward a goal is valuable, regardless of how small it may be.
One of the things that have always kept us motivated is that knowledge sharing is essentially an act of giving. And in that sense, it brings a bit of humanity and warmth to an organizational setting. Keep spreading knowledge ………
Team Legal Bites