An Introduction to Companies under the Indian Company Law

Under the provisions of the Companies Act, 2013, a company in India has several unique features, which make a significant difference to the ease of doing business in India.

Test A company is typically an association of individuals who have come together to meet a common objective and purpose. These people contribute money and create a distinct legal entity to carry out the activities that meet a pre-defined goal.

Purpose of the Companies Act

The Companies Act, 2013 governs all companies in India and defines the functioning, roles, statutory duties and responsibilities of a company, its members and other associated people.

 

The basic objectives of the Companies Act.

  • Encourage and promote favorable entrepreneurship environment
  • Promoting ease of doing business in India, and flexibility in incorporating a company
  • Simplifying the functioning of companies
  • Bringing standardisation to the corporate environment
  • Encourage transparency and ensure ethical corporate governance
  • Protecting the interest of the stakeholders of the company
  • To simplify statutory compliances and procedures
  • To provide a mechanism for dealing with conflicts and empowering various institutional structures.

Related: Post Incorporation Compliance for Companies in India

Features of a Company under the Companies Act

Since the company is a distinct legal entity, it can be seen as an artificial person having the ability to act and be treated as individuals. For instance, a company can sue, and be sued. It can enter into contracts and agreements, hold property, and borrow loans. Here are a few unique and defining characteristics of companies in India defined by the Companies Act, 2013.

Separate Legal Entity 

Once a company is incorporated and receives its Certification of Incorporation, it’s seen as a separate person in the eyes of the law. It is treated as an artificial person. The company is distinct from its members, founders, directors, and employees. This means that the company can earn money, buy property, enter into agreements and at the same time incur debts. Despite the fact that the company has a separate legal identity, it cannot have a status of a Citizen of India, as under the Indian Constitution.

Limited Liability of Members

Unlike partnership firms and sole proprietorships, the liability of the members of the company is limited only to the shares held by them. In an event of a company debt, the personal assets of the members cannot be used to meet the corporate liabilities. Only unpaid shares of the members can be called to meet any such debts. Whereas, in sole proprietorships, the proprietor is wholly liable for the debts of the business.

Perpetual Succession

Since the company has a distinct identity, it also means that the company is not dependent on its members or directors for its survival. As the company is being managed as per the norms of the Companies Act, it will continue to exist and its legal status cannot be questioned. The company cannot cease to exist unless it is struck-off by the books by the Registrar of Companies or wound-up voluntarily or under the Insolvency and Bankruptcy Code.

Holds Assets

Just like the company's' liabilities are its own, any property held by the company is its own, and the members and directors cannot claim ownership over such properties.

Transfer of Shares

The contribution of the members of the company is entitled in shares. These shares can be transferred from one person to the other by way of monetary compensation. While the shares of a public company can be traded freely, there are certain restrictions on the transfer of shares of private companies.

Separate Management

While the members are the owners of the company, the company is managed by the Board of Directors elected by the members of the company. The Board manages the day-to-day functioning of the company.  

One Share-One Vote

The members of the company can exercise certain rights and be involved in certain management decision by way of their voting rights. For instance, certain key decisions of the company have to be made by passing a resolution of the members in the General meeting of the company. The voting rights of the members of the company are equal to the number of shares they hold. For instance, if a member has 100 shares, he gets 100 votes.  

Corporate Veil

The corporate veil refers to the separation of the company from its members and board of directors.

This basically protects the individual from the debts, liabilities, errors and other obligations of the company, and vice versa. However, this protection is not ironclad.

Lifting the Corporate Veil

 

The corporate veil can be pierced if the Court finds evidence that the company is not functioning under the provisions of the Companies Act, holding the members or directors liable for the corporate wrongdoing.

 

With sufficient proof, the court can lift the corporate veil, and the liabilities of the company can fall on all or one of the members of the company, or so as the court decides.

More On: Documents Required for Annual Compliance

Illegal Association of People

Under the Companies Act, an association of more than 50 people, with an objective of carrying out a business for profit, is an illegal association under Section 464.

For instance, a partnership firm of more than 20 partners will be considered an illegal association of people unless registered under the Companies Act or any other recognised legislation.

Legal Consequences  

Illegal associations are not recognised by law. Therefore, any contracts or agreements in the name of the illegal association are considered null and void.

Since there is no corporate veil for illegal associations, the members are entirely liable for any debts and obligations of the company.

Types of Companies

Under the Companies Act, there are different types of companies that can be incorporated. Here is a brief overview:

Private Companies and Public Companies

The stocks of private companies are held by a closely knit group of people, while the stocks of a public company can be held by any member of the public.

  • The key difference between the two is that a public company’s shares are freely traded in the stock market by the public. A private company cannot invite the public to buy the company’s shares.

 

  • In terms of structure, public companies are usually larger in size.

Limited Companies and Unlimited Companies

Limited and unlimited company differ when it comes to the liability of the owners or shareholders of the company.

  • Limited companies have limited liability of the owners, meaning the owners cannot be held liable for the losses and obligations of the company.

 

  • In an unlimited company, the owners are exposed to potential losses and are personally held liable to meet the obligations of the company.

Holding Companies and Subsidiary Companies

When more than 51% of a company is owned by another company, it creates a relationship between a holding and subsidiary company.

  • The holding company, also known as a parent company, usually has no separate operations and manages the stocks and assets of the subsidiary companies.

 

  • A subsidiary company is controlled by the parent company in terms of the ownership and composition of the board.

Section 25 Companies

These companies are a type of Non-Profit Organisation. Such companies are incorporated with the goal of promoting art, science, religion, commerce or with charitable and philanthropic intentions.  

Government Companies

A Government company is one in which not less than 51% of the paid-up share capital is held by the Central Government or a State Government or jointly by

Foreign Companies

These are those companies that have established a business in India but have been incorporated outside India.  

 

Click Here: Register your Company Under Companies Act


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