The Companies Act An Overview; Nature and kinds of Companies;
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1.1
INTRODUCTION
Industrial has revolution led to the
emergence of large scale business
organizations. These organization
require big investments and the risk involved is very high. Limited resources
and unlimited liability of partners are two important limitations of
partnerships of partnerships in undertaking big business. Joint Stock Company
form of business organization has become extremely popular as it provides a
solution to
(3)According to Haney, “Joint Stock
Company is a voluntary association of individuals for profit, having a capital
divided into transferable shares. The ownership of which is the condition of
membership”.From the above definitions, it can be concluded that a company is
registered association which is an artificial legal person, having an
independent legal, entity with
a perpetual succession, a common
seal for its signatures, a common capital comprised of transferable shares and
carrying limited liability.
CHARACTERISTICS OF A COMPANY
The main characteristics of a
company are :
1.
Incorporated association.
A company is created when it is
registered under
the Companies Act. It comes into
being from the date mentioned in the certificate of incorporation. It may be
noted in this connection that Section 11 provides that an association of more
than ten persons carrying on business in banking or an association or more than
twenty persons carrying on any other type of business must be registered
under the Companies Act and is
deemed to be an illegal association, if it is not so registered. For forming a
public company at least seven persons and for a private company at least two
persons are persons are required. These persons will subscribe their names to
the Memorandum of association and also comply with other legal requirements of the
Act in respect of registration to form and incorporate a company, with or without
limited liability [Sec 12 (1)](4)
2.
Artificial legal person.
A company is an artificial person.
Negatively speaking, it is not a natural person. It exists in the eyes of the
law and cannot act on its own. It has to act through a board of directors elected
by shareholders. It was rightly pointed out in Bates V Standard Land Co. that :
“The board of directors are the brains and the only brains of the company,
which is the body and the company can and does act only through them”.
But for many purposes, a company is
a legal person like a natural person. It has the right to acquire and dispose
of the property, to enter into contract with third parties in its own name, and
can sue and be sued in its own name. However, it is not a citizen as it cannot
enjoy the rights under the Constitution of India or Citizenship Act. In State
Trading Corporation of India v C.T.O (1963 SCJ 705), it was held that neither
the provisions of the Constitution nor the Citizenship Act apply to it. It
should be noted that though a company does not possess fundamental rights, yet
it is person in the eyes of law. It can enter into contracts with its
Directors, its members, and outsiders. Justice Hidayatullah once remarked that
if all the members are citizens of India, the company does not become a citizen
of India.
3.
Separate Legal Entity : A company has a legal distinct entity and is
independent of its members. The creditors of the company can recover their
money only from the company and the property of the company. They cannot sue
individual members. Similarly, the company is not in any way liable for the
individual debts of its members. The property of the company is to be used for
the benefit of the company and nor for (5) the personal benefit of the
shareholders. On the same grounds, a member cannot claim any ownership rights
in the assets of the company either individually or jointly during the
existence of the company or in its winding up. At the same time the members of the
company can enter into contracts with the company in the same manner as any other
individual can. Separate legal entity of the company is also recognized by the Income
Tax Act. Where a company is required to pay Income-tax on its profits and when
these profits are distributed to shareholders in the form of dividend, the shareholders
have to pay income-tax on their dividend of income. This proves that a company
that a company and its shareholders are two separate entities.
The principal of separate of legal
entity was explained and emphasized in the famous case of Salomon v Salomon
& Co. Ltd.
The facts of the case are as follows
: Mr. Saloman, the owner of a very prosperous shoe business, sold his business for
the sum of $ 39,000 to Saloman and Co. Ltd. which consisted of Saloman himself,
his wife, his daughter and his four sons. The purchase consideration was paid
by the
company by allotment of & 20,000
shares and $ 10,000 debentures and the balance in cash to Mr. Saloman. The
debentures carried a floating charge on the assets of the company. One share of
$ 1 each was subscribed by the remaining six members of his family. Saloman and
his two sons became the directors of this company. Saloman was the managing
Director. After a short duration, the company went into liquidation. At that
time the statement of affairs’ was like this: Assets :$ 6000, liabilities; Saloman
as debenture (6) holder $ 10,000 and unsecured creditors $ 7,000. Thus its
assets were running short of its liabilities b $11,000
The unsecured creditors claimed a
priority over the debenture holder on the ground that company and Saloman were
one and the same person. But the House of Lords held that the existence of a
company is quite independent and distinct from its members and that the assets
of the company must be utilized in payment of the debentures first in priority
to unsecured creditors. Saloman’s case established beyond doubt that in law a
registered company is an entity distinct from its members, even if the person
hold all the shares in the company. There is no difference in principle between
a company consisting of only two shareholders and a company consisting of two
hundred members. In each case the company is a separate legal entity. The
principle established in Saloman’s case also been applied in the following: Lee
V. Lee’s Airforming Ltd. (1961) A.C. 12 Of the 3000 shares in Lee’s Air Forming
Ltd., Lee held 2999 shares. He voted himself the managing Director and also became
Chief Pilot of the company on a salary. He died in an aircrash while working for
the company. His wife was granted compensation for the husband in the course of
employment. Court held that Lee was a separate person from the company he
formed, and compensation was due to the widow. Thus, the rule of corporate
personality enabled Lee to be the master and servant at the same time.
The principle of separate legal
entity of a company has been, in fact recognized much earlier than in Saloman’s
case. In Re Kondoi Tea Co Ltd. (1886 ILR 13 Cal 43), (7) it was held by
Calcutta High Court that a company was a separate person, a separate body
altogether from its Shareholders. In Re. Sheffield etc. Society - 22 OBD 470),
it has been held that a corporation is a legal person, just as much in
individual but with no physical existence. The characteristic of separate
corporate personality of a company was also emphasized by Chief Justice
Marshall of USA when he defined a company “as a person, artificial, invisible,
intangible and existing only in the eyes of the law. Being a mere creation of
law, it possesses only those properties which the charter of its creation confers
upon it either expressly or as accident to its very existence”. [Trustees of Darmouth
College v woodward (1819) 17 US 518)
4.
Perpetual Existence.
A company is a stable form of
business organization. Its life does not depend upon the death, insolvency or
retirement of any or all shareholder
(s) or director (s). Law creates it
and law alone can dissolve it. Members may come and go but the company can go
on for ever. “During the war all the member of one private company , while in
general meeting, were killed by a bomb. But the company survived; not even a
hydrogen bomb could have destroyed i”. The company may be compared with a
flowing river where the water keeps on changing continuously, still the
identity of the river remains the same. Thus, a company has a perpetual
existence, irrespective of changes in its membership.
5.
Common Seal.
As was pointed out earlier, a
company being an artificial person has no body similar to natural person and as
such it cannot sign documents for itself. It acts through natural person who
are called its directors. But having a legal personality,
(8)
it can be bound by only those
documents which bear its signature. Therefore, the law has provided for the use
of common seal, with the name of the company engraved on it,
as a substitute for its signature.
Any document bearing the common seal of the company will be legally binding on
the company. A company may have its own regulations in its Articles of
Association for the manner of affixing the common seal to a document. If the
Articles are silent, the provisions of Table-A (the model set of articles
appended to the Companies Act) will apply. As per regulation 84 of Table-A the
seal of the company shall not be affixed to any instrument except by the
authority of a resolution of the Board or a Committee of the Board authorized
by it in that behalf, and except in the presence of at least two directors and
of the secretary or such other person as the Board may appoint for the purpose,
and those two directors and the secretary or other person aforesaid shall sign
every instrument to which the seal of the company is soaffixed in their
presence.
6.
Limited Liability :
A company may be company limited by
shares or a company limited by guarantee. In company limited by shares, the liability
of members is limited to the unpaid value of the shares. For example, if the
face value of a share in a company is Rs. 10 and a member has already paid Rs.
7 per share, he can be called upon to pay not more than Rs. 3 per share during
the lifetime of the company. In a company limited by guarantee the liability of
members is limited to such amount as the member may undertake to contribute to
the assets of the company in the event of its being wound up.
7.
Transferable Shares. In a public
company, the shares are freely transferable. The right to transfer shares is a
statutory right and it cannot be taken away by a provision
(9)
in the articles. However, the
articles shall prescribe the manner in which such transfer of shares will be
made and it may also contain bona fide and reasonable restrictions on the right
of members to transfer their shares. But absolute restrictions on the rights of
members to transfer their shares shall be ultra vires. However, in the case of
a private company, the articles shall restrict the right of member to transfer
their shares in companies with its statutory definition. In order to make the
right to transfer shares more effective, the shareholder can apply to the
Central Government in case of refusal by the company to register a transfer of
shares.
8.
Separate Property : As a company is
a legal person distinct from its members, it is capable of owning, enjoying and
disposing of property in its own name. Although its capital and assets are
contributed by its shareholders, they are not the private and joint owners of
its property. The company is the real person in which all its property is vested
and by which it is controlled, managed and disposed of.
9.
Delegated Management : A joint stock
company is an autonomous, self-
governing and self-controlling
organization. Since it has a large number of members, all of them cannot take
part in the management of the affairs of the company. Actual control and
management is, therefore, delegated by the shareholders to their elected
representatives, know as directors.
They look after the day-to-day working of the
company. Moreover, since
shareholders, by majority of votes, decide the general policy
of the company, the management of
the company is carried on democratic lines.
Majority decision and centralized
management compulsorily bring about unity of action
1.4 DISTINCTION BETWEEN COMPANY AND
PARTNERSHIP
The difference between a company and
partnership is as follows:
Company Partnership
1. Mode of creation By Registration
by By AgreementStatute.
2. Legal Statute Legal entity
distinct Firm and partnersfrom members, are not separate; noperpetual
succession. separate entity;uncertain life
3. Liability Limited liability of
Unlimited joint andmembers several liability of partners
4. Authority Divorce between Right
to share mana ownership and gement, common and management ownership and Representative
Management. Management Mutual agency -
Implied authority.
5. Transfer Public Co.-freely
Ordinarily no right of of shares transferable; transferee transfer of share by
a gets all the rights of partner-limited rights the transferor of transferee
6. Number of Private Co-Minimum 2
Minimum 2 members and Maximum 50 Maximum 20. public Co. Minimum7 and Maximum
unlimited.
7. Resources Large and unlimited
Personal resources of resources partners are limited.
8. General Memorandum defines Easy
to change the powers and confines the scope agreement and so also of the
company. the powers of the alteration difficult. partners.
9. Legal Statutory books, No legal
formalities formalities Audit, Publication Registration not Registration,
compulsory. No audit,
filing, etc. lots of legal no
publication of formalities accounts etc.
10. Dissolution Only according to
the Dissolution by provisions of law- agreement by usually by an order of
notice, by court.
the court. Death of a partner Death
of a share- may mean dissolution holder does not of partnership affect the
existence of a company.
1.5 TYPES OF COMPANY
Joint stock company can be of
various types. The following are the important types
of company:
1. Classification of Companies by
Mode of Incorporation
Depending on the mode of
incorporation, there are three classes of joint stock
companies.
A. Chartered companies.
These are incorporated under a special charter by a monarch. The East India
Company and The Bank of England are examples of chartered incorporated in
England. The powers and nature of business of a chartered company are defined
by the charter which incorporates it. A chartered company has wide powers. It
can deal with its property and bind itself to any contracts that any ordinary
person can. In case the company deviates from its business as prescribed by
the charted, the Sovereign can annul
the latter and close the company. Such companies do not exist in India.
B. Statutory Companies.
These companies are incorporated by a Special Act passed by the Central or
State legislature. Reserve Bank of India, State Bank of India, Industrial Finance
Corporation, Unit Trust of India, State Trading corporation and Life Insurance Corporation
are some of the examples of statutory companies. Such companies do not
have any memorandum or articles of
association. They derive their powers from the Acts constituting them and enjoy
certain powers that companies incorporated under the Companies Act have.
Alternations in the powers of such companies can be brought about by
legislative amendments. (13)The provisions of the Companies Act shall apply to
these companies also except in so far as provisions of the Act are inconsistent
with those of such Special Acts [Sec 616 (d)] These companies are generally
formed to meet social needs and not for the purpose of earning profits. C.
Registered or incorporated companies. These are formed under the Companies Act,
1956 or under the Companies Act passed earlier to this. Such companies come into
existence only when they are registered under the Act and a certificate of incorporation
has been issued by the Registrar of Companies. This is the most popular mode of
incorporating a company. Registered companies may further be divided into three
categories of the following. i) Companies limited by Shares : These types of
companies have a share capital and the liability of each member or the company
is limited by the Memorandum to the extent of face value of share subscribed by
him. In other words, during the existence of the company or in the event of
winding up, a member can be called upon to pay the amount remaining unpaid on
the shares subscribed by him. Such a company is called company limited by
shares. A company limited by shares may be a public company or a private
company. These are the most popular types of companies. ii) Companies Limited
by Guarantee : These types of companies may or may not have a share capital.
Each member promises to pay a fixed sum of money specified in
the Memorandum in the event of
liquidation of the company for payment of the debts
and liabilities of the company [Sec
13(3)] This amount promised by him is called (14) ‘Guarantee’. The Articles of
Association of the company state the number of member with which the company is
to be registered [Sec 27 (2)]. Such a company is called a company limited by
guarantee. Such companies depend for their existence on entrance and
subscription fees. They may or may not have a share capital. The liability of
the member is limited to the extent of the guarantee and the face value of the
shares subscribed by them, if the company has a share capital. If it has a
share capital, it may be a public company or a private company. The amount of
guarantee of each member is in the nature of reserve capital. This amount cannot
be called upon except in the event of winding up of a company. Nontrading or
non-profit companies formed to promote culture, art, science, religion, commerce,
charity, sports etc. are generally formed as companies limited by guarantee.
iii) Unlimited Companies
: Section 12 gives choice to the promoters to form a company with or without
limited liability. A company not having any limit on the liability of its
members is called an ‘unlimited company’ [Sec 12(c)]. An unlimited company may
or may not have a share capital. If it has a share capital it may be a public
company or a private company. If the company has a share capital, the article
shall state the amount of share capital with which the company is to be
registered [Sec 27 (1)] The articles of an unlimited company shall state the
number of member with
which the company is to be
registered.
II. On the Basis of Number of
Members On the basis of number of members, a company may be : (1) Private Company,
and (2) Public Company.(15)
A. Private
Company
According to Sec. 3(1) (iii) of the
Indian Companies Act, 1956, a private company is that company which by its
articles of association :
i) limits the number of its members
to fifty, excluding employees who are
members or ex-employees who were and
continue to be members;
ii) restricts the right of transfer
of shares, if any;
iii) prohibits any invitation to the
public to subscribe for any shares or
debentures of the company.
Where two or more persons hold share
jointly, they are treated as a single member. According to Sec 12 of the
Companies Act, the minimum number of members to form a private company is two.
A private company must use the word “Pvt” after its name. Characteristics or
Features of a Private Company. The main features of a private
of a private company are as follows
:
i) A private company restricts the
right of transfer of its shares. The shares
of a private company are not as
freely transferable as those of public
companies. The articles generally
state that whenever a shareholder of a
Private Company wants to transfer
his shares, he must first offer them to
the existing members of the existing
members of the company. The price
of the shares is determined by the
directors. It is done so as to preserve
the family nature of the company’s
shareholders.
(16)
ii) It limits the number of its
members to fifty excluding members who are
employees or ex-employees who were
and continue to be the member.
Where two or more persons hold share
jointly they are treated as a single
member. The minimum number of
members to form a private company
is two.
iii) A private company cannot invite
the public to subscribe for its capital or shares of debentures. It has to make
its own private arrangement.
B. Public company
According to Section 3 (1) (iv) of
Indian Companies Act. 1956 “A public
company which is not a Private
Company”,
If we explain the definition of
Indian Companies Act. 1956 in regard to
the public company, we note the
following :
i) The articles do not restrict the
transfer of shares of the company
ii) It imposes no restriction no
restriction on the maximum number of the
members on the company.
iii) It invites the general public
to purchase the shares and debentures of the companies (Differences between a
Public Company and a Private company)
1. Minimum number : The minimum
number of persons required to form a
public company is 7. It is 2 in case
of a private company.
2. Maximum number : There is no
restriction on maximum number of membersin a public company, whereas the
maximum number cannot exceed 50 in a privatecompany.(17)
3. Number of directors. A public
company must have at least 3 directors whereas a private company must have at
least 2 directors (Sec. 252)
4. Restriction on appointment of
directors. In the case of a public company, the directors must file with the
Register a consent to act as directors or sign an undertaking for their
qualification shares. The directors or a private company need not do so (Sec
266)
5. Restriction on invitation to
subscribe for shares. A public company invites the general public to subscribe
for shares. A public company invites the general public to subscribe for the
shares or the debentures of the company. A private company by its Articles
prohibits invitation to public to subscribe for its shares.
6. Name of the Company : In a
private company, the words “Private Limited” shall
be added at the end of its name.
7. Public subscription : A private
company cannot invite the public to purchase
its shares or debentures. A public
company may do so.
8. Issue of prospectus : Unlike a
public company a private company is not expected
to issue a prospectus or file a
statement in lieu of prospectus with the Registrar
before allotting shares.
9. Transferability of Shares. In a
public company, the shares are freely transferable
(Sec. 82). In a private company the
right to transfer shares is restricted by Articles.
10. Special Privileges. A private
company enjoys some special privileges. A public
company enjoys no such privileges.
11. Quorum. If the Articles of a
company do not provide for a larger quorum. 5
members personally present in the
case of a public company are quorum for a
meeting of the company. It is 2 in
the case of a private company (Sec. 174)
(18)
12. Managerial remuneration. Total
managerial remuneration in a public company
cannot exceed 11 per cent of the net
profits (Sec. 198). No such restriction
applies to a private company.
13. Commencement of business. A
private company may commence its business
immediately after obtaining a
certificate of incorporation. A public company
cannot commence its business until
it is granted a “Certificate of Commencement
of business”.
Special privileges of a Private
Company
Unlike a private a public company is
subject to a number of regulations and
restrictions as per the requirements
of Companies Act, 1956. It is done to safeguard
the interests of
investors/shareholders of the public company. These privileges can be
studied as follows :
a) Special privileges of all
companies. The following privileges are available to
every private company, including a
private company which is subsidiary of a public
company or deemed to be a public
company :
1. A private company may be formed
with only two persons as member. [Sec.12(1)]
2. It may commence allotment of
shares even before the minimum subscription is
subscribed for or paid (Sec. 69).
3. It is not required to either
issue a prospectus to the public of file statement in
lieu of a prospectus. (Sec 70 (3)]
4. Restrictions imposed on public
companies regarding further issue of capital do
not apply on private companies. [Sec
81 (3)]
(19)
5. Provisions of Sections 114 and
115 relating to share warrants shall not apply to
it. (Sec. 14)
6. It need not keep an index of
members. (Sec. 115)
7. It can commence its business
after obtaining a certificate of incorporation. A
certificate of commencement of
business is not required. [Sec. 149 (7)]
8. It need not hold statutory
meeting or file a statutory report [Sec. 165 (10)]
9. Unless the articles provide for a
larger number, only two persons personally
present shall form the quorum in
case of a private company, while at least five
member personally present form the
quorum in case of a public company (Sec.
174).
10. A director is not required to
file consent to act as such with the Registrar.
Similarly, the provisions of the Act
regarding undertaking to take up qualification
shares and pay for them are not
applicable to directors of a private companies
[Sec. 266 (5) (b)]
11. Provisions in Section 284
regarding removal of directors by the company in
general meeting shall not apply to a
life director appointed by a private company
on or before 1st April 1952 [Sec.
284 (1)]
12. In case of a private company,
poll can be demanded by one member if not more
than seven members are present, and
by two member if not more than seven
member are present. In case of a
public company, poll can be demanded by persons
having not less than one-tenth of
the total voting power in respect of the resolution
or holding shares on which an
aggregate sum of not less than fifty thousand
rupees has been paid-up (Sec. 179).
(20)
13. It need not have more than two
directors, while a public company must have at
least three directors (Sec. 252)
b) Privileges available to an
independent private company (i.e. one which is not a
subsidiary of a public company)
An independent private company is
one which is not a subsidiary of a public
company. The following special
privileges and exemptions are available to an
independent private company.
1. It may give financial assistance
for purchase of or subscription for shares in the
company itself.
2. It need not, like a public
company, offer rights shares to the equity shareholders
of the company.
3. The provisions of Sec. 85 to 90
as to kinds of share capital, new issues of share
capital, voting, issue of shares
with disproportionate rights, and termination of
disproportionately excessive rights,
do not apply to an independent private
company.
4. A transfer or transferee of
shares in an independent private company has no right
of appeal to the Central Government
against refusal by the company to register a
transfer of its shares.
5. Sections 171 to 186 relating to
general meeting are not applicable to an
independent private company if it
makes its own provisions by the Articles. Some
provisions of these Sections are,
however made expressly applicable.
6. Many provisions relating to
directors of a public company are not applicable to
an independent private company, e.g.
(21)
a) it need not have more than 2
directors.
b) The provisions relating to the
appointment, retirement, reappointment,
etc. of directors who are to retire
by rotation and the procedure relating,
there to are not applicable to it.
c) The provisions requiring the
giving of 14 days’ notice by new candidates
seeking election as directors, as
also provisions requiring the Central
Government’s sanction for increasing
the number of directors by
amending the Articles or otherwise
beyond the maximum fixed in the
Articles, are not applicable to it.
d) The provisions relating to the
manner of filing up casual vacancies among
directors and the duration of the
period of office of directors and the
requirements that the appointment of
directors should be voted on
individually and that the consent of
each candidate for directorship should
be filed with the Registrar, do not
apply to it.
e) The provisions requiring the
holding of a share qualification by directors
and fixing the time within which such
qualification is to be acquired and
filing with the Registrar of a
declaration of share qualification by each
director are also not applicable to
it.
f) It may, by its Articles, Provide
special disqualifications for appointment
of directors.
g) It may provide special grounds
for vacation of office of a director.
h) Sec. 295 prohibiting loans to
directors does not apply to it.
(22)
i) An interested director may
participate or vote in Board’s proceedings
relating to his concern of interest
in any contract of arrangement.
7. The restrictions as to the number
of companies of which a person may be
appointed managing director and the
prohibition of such appointment for more
than 5 years at a time, do not apply
to it
8. The provisions prohibiting the
subscribing for, or purchasing of, shares or
debentures of other companies in the
same group do not apply to it.
9. The provisions of Section 409
conferring power on the Central Government to
present change in the Board of
directors of a company where in the opinion of
the Central Government such change
will be prejudicial to the interest of the
company, do not apply to it.
When a Private company becomes a
Public company
A private company shall become a
public company in following cases :
i) By default : When it fails to
comply with the essential requirements of a private
company provided under Section 3 (1)
(iii) Default in complying with the said
three provisions shall disentitle a
private company to enjoy certain privileges
(Sec. 43).
ii) A private company which is a
subsidiary of another public company shall be
deemed to be a public company.
iii) By provisions of law - Section
43-A.
Section 43-A
a) Where not less than 25% of the
paid-up share capital of a private company
is held by one or more bodies”
corporate such a private company shall
(23)
become a public company from the
data in which such 25% is held by
body corporate [Sec. 43-A (1)]
b) Where the average annual turnover
of a private company is not less than
Rs. 10 crores during the relevant
period, such a private company shall
become a public company after the
expiry of the period of three months
from the last day of the relevant
period when the accounts show the said
average annual turnover [Sec. 43 A
(1 A)].
c) When a private company holds not
less than 25% of the paid up share
capital of a public company the
private company shall become a public
company from the date on which the
private company holds such 25%
[Sec. 43A (IB)].
d) Where a private company accepts,
after an invitation is made by an
advertisement of receiving deposits
from the public other than its
members, directors or their
relatives, such private company shall become
a public company [Sec. 43A (IC)].
iv) By Conversion : When the private
company converts itself into a public
company by altering its Articles in
such a manner that they no longer include essential
requirements of a private company
under Section 3 (1) (iii). On the data of such
alternations, it shall cease to be
private company. It shall comply with the procedure of
converting itself into a public
company [Sec. 44].
The Articles of Association of such
a public company may continue to have the
three restrictions and may continue
to have two directors and less than seven members.
(24)
Within 3 months of such a
conversion. Registrar of Companies shall be intimated. The
Registrar shall delete the word
‘Private’ before the words ‘Limited’ in the name of the
company and shall also make
necessary alternations in the certificate of incorporation.
III. On the basis of Control
On the basis of control, a company
may be classified into :
1. Holding companies, and
2. Subsidiary Company
1. Holding Company [Sec. 4(4)]. A
company is known as the holding company
of another company if it has control
over the other company. According to Sec 4(4) a
company is deemed to be the holding
company of another if, but only if that other is its
subsidiary.
A company may become a holding
company of another company in either of the
following three ways :-
a) by holding more than fifty per
cent of the normal value of issued equity
capital of the company; or
b) By holding more than fifty per
cent of its voting rights; or
c) by securing to itself the right
to appoint, the majority of the directors of the
other company , directly or
indirectly.
The other company in such a case is
known as a “Subsidiary company”. Though
the two companies remain separate
legal entities, yet the affairs of both the companies
are managed and controlled by the
holding company. A holding company may have any
number of subsidiaries. The annual
accounts of the holding company are required to
disclose full information about the
subsidiaries.
2. Subsidiary Company. [Sec. 4 (I)].
A company is know as a subsidiary of another
company when its control is
exercised by the latter (called holding company) over the
(25)
former called a subsidiary company.
Where a company (company S) is subsidiary of
another company (say Company H), the
former (Company S) becomes the subsidiary
of the controlling company (company
H).
IV. On the basis of Ownership of
companies
a) Government Companies. A Company
of which not less than 51% of
the paid up capital is held by the
Central Government of by State
Government or Government singly or
jointly is known as a Government
Company. It includes a company
subsidiary to a government company.
The share capital of a government
company may be wholly or partly
owned by the government, but it
would not make it the agent of the
government . The auditors of the
government company are appointed by
the government on the advice of the
Comptroller and Auditor General of
India. The Annual Report along with
the auditor’s report are placed before
both the House of the parliament.
Some of the examples of government
companies are - Mahanagar Telephone
Corporation Ltd., National Thermal
Power Corporation Ltd., State
Trading Corporation Ltd. Hydroelectric
Power Corporation Ltd. Bharat Heavy
Electricals Ltd. Hindustan Machine
Tools Ltd. etc.
b) Non-Government Companies. All
other companies, except the
Government Companies, are called
non-government companies. They
do not satisfy the characteristics
of a government company as given
above.
V. On the basis of Nationality of
the Company
a) Indian Companies : These
companies are registered in India under the
Companies Act. 1956 and have their
registered office in India. Nationality of
the members in their case is
immaterial.
b) Foreign Companies : It means any
company incorporated outside India which
has an established place of business
in India [Sec. 591 (I)]. A company has an
(26)
established place of business in
India if it has a specified place at which it carries
on business such as an office, store
house or other premises with some visible
indication premises. Section 592 to
602 of Companies Act, 1956 contain
provisions applicable to foreign
companies functioning in India.
1.6 SUMMARY
Company may be defined as group of
persons associated together to achieve
some common objective. A company
formed and registered under the Companies Act
has certain special features, which
reveal the nature of a company. These characteristics
are also called he advantages of a
company because as compared with other business
organizations, these are in fact,
beneficial for a company. Companies can be classified
into five categories according to
the mode of incorporation on the basis of number of
members, on the basis of control, on
the basis of ownership and on the basis of nationality
of the company.
1.7 KEYWORDS
Company: A company means a body of
individuals associated together for a common
objective, which may be business for
profit or for some charitable purposes.
Registered Company: A registered
company is one which is formed and registered
under the Indian Companies Act, 1956
or under any earlier Companies Act in
force in India.
Public Company: A public company
means a company which is not a private company.
Any seven or more persons can join
hands to form a public company.
Holding Company: A company shall be
deemed to be the holding company to another
if that other is its subsidiary.
Unlimited Company: A company not
having any limit on the liability of its member is
called an unlimited company.
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