Subject: Company Law

Unit I - Topic 1

Prepared by J.Deepak Kumar

 Company Law and the Acts governing the
law

Companies
Companie
Act
s Act
2013
1956
(Revised)

The 2013 Act is divided into 29 chapters containing 470 sections as against 658 Sections
in the Companies Act, 1956 and has 7 schedules.

The Act has replaced The Companies Act, 1956 (in a partial manner) after receiving the
assent of the President of India on 29 August 2013.The section 1 of the companies Act
2013 came into force on 30th August 2013.

98 different sections of the companies Act came into force on 12th September 2013 with
few changes like earlier private companies maximum number of members were 50 and
now it will be 200. A new term of "one-person company" is included in this act that will be
a private company and with only 98 sections of the Act notified.
Corporate law (also known as business law or enterprise law or sometimes company law)
is the body of law governing the rights, relations, conduct of persons, companies , organization
and business.

The term refers to the legal practice of law relating to corporations, or to the theory
of corporations. Corporate law often describes the law relating to matters which derive directly
from the life-cycle of a corporation. It thus encompasses the formation, funding, governance, and
death of a corporation.

Meaning of a Company

The word ‘company’ is derived from the Latin word

(Com=with or together; panis =bread),

and it originally referred to an association of persons

who took their meals together. In the leisurely past,
merchants took advantage of festive gatherings, to
discuss business matters.
 The HISTORICAL DEVELOPMENT OF CORPORATE LAW in India is
marked by several key milestones and legislative changes that reflect
the evolution of the business environment in the country. Here’s an
overview of its progression:
Post-Independence Developments
Pre-Independence Era
4.Companies Act of 1956: A landmark
1.Early Companies Act (1850): The first
legislation that replaced the 1913 Act, it
legislation related to companies was the
aimed to regulate company formation,
Indian Companies Act of 1850, which
management, and dissolution. This act
allowed for the registration of companies
introduced more detailed provisions for
and limited liability.
corporate governance, financial disclosures,
2.Joint Stock Companies Act (1857):
and the protection of minority shareholders.
This act laid down the framework for joint-
It also established the framework for the
stock companies, enabling them to be
Registrar of Companies.
formed and governed by a set of rules.
5.Economic Liberalization (1991): The
3.Companies Act of 1913: This was a
liberalization of the Indian economy in the
significant step in consolidating company
early 1990s necessitated reforms in
law in India, providing a more
corporate law to attract foreign investment
comprehensive framework for the
and promote competition. This period saw
registration and regulation of companies. It
amendments to the Companies Act to
introduced concepts such as limited liability
facilitate easier incorporation and compliance
and defined the rights and duties of
for companies.
shareholders and directors.
Recent Reforms

6.Companies Act of 2013: A major

overhaul of corporate law aimed at
Current Trends and Challenges
improving corporate governance, enhancing
transparency, and protecting stakeholders. •Corporate Governance: There is an
Key features included the introduction of
ongoing emphasis on improving
the concept of corporate social
corporate governance standards, with
responsibility (CSR), stricter regulations for
greater scrutiny on board structures
financial reporting, and improved rights for
and the responsibilities of directors.
minority shareholders. •Digital Transformation: The
7.Insolvency and Bankruptcy Code
adoption of technology in corporate
(2016): This code aimed to streamline the
governance and compliance processes
insolvency process and promote ease of
is increasing, with initiatives aimed at
doing business in India. It provided a
e-governance in company registration
framework for the resolution of insolvency
and reporting.
and bankruptcy cases for companies. •Environmental and Social
8.Amendments and Updates: Since
Governance (ESG): There is a
2013, there have been numerous
growing focus on sustainable business
amendments to the Companies Act to
practices and corporate responsibility,
address emerging challenges and improve
reflecting global trends in ESG
compliance. These include measures to
investing.
simplify procedures, enhance regulatory
oversight, and improve corporate
governance standards.
What Is a Company?

A company is a legal entity formed by a group of individuals to engage in and operate a business
(commercial or industrial) enterprise. A company may be organized in various ways for tax and
financial liability purposes depending on the corporate law of its jurisdiction.

Ownership structure of the company:

 Partnership
 Proprietorship
 Corporation

They can also be

distinguished between
private and public
companies. Both have
different ownership
structures, regulations,
and financial reporting
requirements.
DEFINITION OF A COMPANY

A company is a natural legal entity formed by the association and group of people
to work together towards achieving a common objective. Some of the main
definitions of the company are as follows;

According to the definition of a company by the Indian Act 2013;

‘‘A registered association which is an artificial legal person, having an independent legal, entity
with perpetual succession, a common seal for its signatures, a common capital comprised of
transferable shares and carrying limited liability.’’

According to the US legal definition;

‘‘A company can be a corporation, partnership, association, joint-stock company, trust fund, or
organized group of persons, whether incorporated or not, and (in official capacity) any receiver,
trustee in bankruptcy, or similar official, or liquidating agent, for any of the foregoing.’’

According to Justice
Marshall,
According to Justice James,
“a company is an artificial
“a company is an Association
person, has no physical
of persons united for a
existence. It is invisible and
common object”
intangible. It exists only in
 CHARACTERISTICS OF A COMPANY

•Corporate Body: A company needs to be registered

under the Companies Act, 2013. Any other
organization incorporated with the Registrar of
 Corporate Body Companies, and subsequently not registered cannot
be considered as a company.
 Separate Legal Entity
•Separate Legal Entity: A company exists as a
 Limited Liability separate legal entity which is different from its
shareholders and members. Due to this feature,
 Transferability of Shares shareholders can enter into a contract with the
company and can also sue the company and be sued
 Common Seal by the company.

 Perpetual Succession •Limited Liability: As the company exists as a

separate entity, members of the company are not
 Number of Members liable for the debts of the company. Liability of
members of a company is limited to the extent of the
shares that are held by them or by the extent of the
guarantee amount
 •Perpetual Succession:
The company being an artificial person
established by law perpetuates to exist
regardless of the differences in its
membership. In simple words, a company
•Transferability of Shares: is an artificial person. Therefore, it does
Shareholders of a public limited not have any restrictions on age. The
company can transfer their shares as per factors like death, insolvency, retirement or
the rules laid down in the articles of the insanity of one or all of the members
association. However, in case of a do not impact the company status.
private limited company, there might be
some restrictions on the transfer of •Number of Members:
shares. As per the Companies Act, 2013, the
minimum number of members required to
•Common Seal: start a public limited company is seven
The firm is an artificial entity or a while for a private limited company, it is
person, and therefore cannot sign its two. The maximum number of members
name by itself. It creates the necessity for a public limited company can be
of a common seal that can be used for unlimited while it is restricted to 200 for a
representing the decisions made on private limited company.
behalf of the company.
 MEANING OF CORPORATE VEIL
 A corporate veil is a legal concept that separates the acts done by the companies and
organizations from the actions of the shareholders.
 It protects the shareholders from being liable for the actions done by the company.
 This is not an absolute right the court depending on the facts of the case can take the
decision whether the shareholder is liable or not.

Lifting of Corporate Veil (Piercing the Corporate Veil)

 By a fiction of law, a company is seen as a distinct entity separated from its members, but
in reality, it is an association of persons who in fact the beneficial owners of the company
and its corporate property.
 This fiction is created by a veil and is called the Corporate veil. Lifting or piercing of
corporate veil means ignoring the fact that a company is a separate legal entity and has a
separate identity (Corporate personality).
 This concept disregards the separate identity of the company and looks behind the true
owners or real persons who are in control of the company.

The separate personality of a company is a statutory privilege and it must

be used for a legitimate purpose only. Whenever and wherever a
fraudulent or dishonest use is made of the legal entity, the individuals
will not be allowed to hide behind the curtain of corporate personality. The
appropriate authority will break this shell of the company and sue
the individuals who have done or committed such a crime or offence. This
lifting of the curtain is called a Lifting of the Corporate veil.
 Statutory Provisions in support of Lifting the Corporate
1. Reduction of number of
Veil
members below the statutory
minimum:
If at any time the minimum number
of members of a company falls
below two, in case of Private 2. Failure to refund application
company or below seven, in case of fee:
Public company; then the company The directors of the company shall
can carry on the business for a be jointly and severally liable to
period of six months while the repay the money (application
number is so reduced, every person money) with an interest of six
who is a member of the company percent per annum from the date of
during the time that it still expiry of one hundred and thirtieth
continues to carry on the business, day if they fail to repay the
knowing the fact that the minimum application money without interest
number of members is reduced and within one hundred and twenty days
the grace period of six months is when the company fails to allot
also finished, then as the case may shares.
be, the company and its members
will be held liable and can sue an
amount which they made during
those six months or else the
company may be severally sued,
3. Misdescription of company’s 4. Fraudulent trading:
name: Under section 339 of the Companies Act,
An officer of an organization 2013, If in the course of the winding-up of a
(company) who signs any bill of company, it appears that any business of
the company has been carried on with
trade, hundi, promissory note, check
intent to defraud creditors of the company
wherein the name of the or any other persons or for any fraudulent
organization isn’t referenced in the purpose, the Tribunal, on the application of
recommended way, such official can the Official Liquidator, or the Company
be held personally liable to the Liquidator or any creditor or contributory of
holder of the bill of trade, hundi, etc. the company, may, if it thinks it proper so
except if it is properly paid by the to do, declare that any person, who is or
company. has been a director, manager, or officer of
5. For investigating company’s the company or any persons who were
ownership: knowingly parties to the carrying on of the
Under section 216 of the Companies business in the manner aforesaid shall be
Act, 2013, the Central Government personally responsible, without any
may appoint Inspectors to limitation of liability, for all or any of the
investigate and report on the debts or other liabilities of the company as
membership of the company for the the Tribunal may direct.
purpose of determining the true Every person who had the knowledge of
individuals who are financially such fraud will be punishable with
interested in the company and who imprisonment for a term which may extend
control its policy. Thus, the Central to two years or with a fine which can
Government may ignore the extend up to fifty thousand or with both.
Corporate veil.