The Companies Act, 2013

1. Introduction to the Companies Act, 2013

• The Companies Act, 2013 was enacted to consolidate and amend the law relating to companies.
• It replaced the Companies Act, 1956 because business conditions, corporate governance expectations and investor-protection needs had changed.
• The Act contains 470 sections, 7 schedules and is divided into 29 chapters.
• A large part of company regulation also operates through Companies Rules.
• The Act aims to improve corporate governance, simplify compliance, protect minority investors and bring modern corporate regulation.

2. Applicability of the Companies Act, 2013

• Companies incorporated under the Companies Act, 2013.
• Companies incorporated under any previous company law.
• Insurance companies, except where inconsistent with insurance laws.
• Banking companies, except where inconsistent with the Banking Regulation Act.
• Companies engaged in generation or supply of electricity, except where inconsistent with the Electricity Act.
• Companies governed by special Acts, subject to those special laws.
• Body corporates notified by the Central Government.

3. Meaning of Company

• A company is an incorporated association created by law.
• It has a legal identity separate from its members.
• It can own property, enter into contracts, sue and be sued in its own name.
• Section 2(20) defines company as a company incorporated under this Act or under any previous company law.

4. Main Features of a Company

5. Separate Legal Entity

• On registration, company gets a personality separate from its shareholders.
• Company’s property belongs to the company, not to the shareholders personally.
• Members can contract with the company and can also become creditors of the company.
• Company’s creditors sue the company, not the individual shareholders.

6. Perpetual Succession

• Company’s life is independent of the life of its members.
• Death, insolvency, insanity or transfer of shares by members does not end the company.
• Only legal process such as winding up or striking off can end a company.

7. Limited Liability

• In a company limited by shares, member’s liability is limited to the unpaid amount on shares held.
• In a company limited by guarantee, member’s liability is limited to the guaranteed amount, payable only on winding up.
• In an unlimited company, members may have unlimited liability, generally enforceable during winding up.

8. Artificial Legal Person and Common Seal

• A company is artificial because it is not born naturally; it is created by law.
• It is legal because law gives it rights and duties.
• It can own property, contract and litigate, but cannot do human-only acts like marriage, taking oath or practising a profession.
• Since it has no physical body, it acts through directors and authorised persons.
• Common seal is optional after Companies (Amendment) Act, 2015.
• If company has no common seal, authorisation may be done by two directors or by one director and company secretary, wherever applicable.

9. Corporate Veil Theory

• Corporate veil means law separates the company from its members.
• Members are generally protected from personal liability for acts and debts of company.
• This protection is called corporate insulation.
• Salomon vs. Salomon & Co. Ltd. is the landmark case establishing separate corporate personality.

10. Lifting of Corporate Veil

Courts may ignore the separate legal personality of company and look at the real persons behind it where justice, law or public interest requires it.

11. Classes of Companies – Overview

• Companies may be classified based on liability, number of members, control, access to capital and special nature.
• Many questions are direct classification-based questions.

12. Companies Based on Liability

Company Limited by Shares

• Member’s liability is limited to the unpaid amount on shares held.
• Personal assets of shareholder cannot be used to pay company debts.

Company Limited by Guarantee

• Member undertakes to contribute a fixed amount if company is wound up.
• Liability arises only at winding up and only up to the guaranteed amount.
• Useful where working capital is not mainly raised through share capital.

Unlimited Company

• No limit on liability of members.
• Members may be called to contribute towards company debts during winding up.
• Member may seek contribution from other members.

13. One Person Company (OPC)

• Section 2(62): OPC means a company with only one person as member.
• OPC is a private company in nature.
• It encourages entrepreneurship with corporate status and limited liability.
• Nominee is required in memorandum; nominee steps in on death or incapacity of the member.
• Only a natural person who is an Indian citizen, resident in India or otherwise, and has stayed in India for at least 120 days during the immediately preceding financial year can incorporate an OPC or act as nominee.
• No person can incorporate more than one OPC or become nominee in more than one OPC.
• Minor cannot become member or nominee and cannot hold shares with beneficial interest.
• OPC cannot be incorporated or converted into Section 8 company.
• OPC cannot carry out non-banking financial investment activities including investment in securities of any body corporate.

14. Private Company and Public Company

15. Small Company

• Small company is a private company.
• It should not be a public company.
• As per the module, small company thresholds are linked to paid-up capital and turnover, subject to prescribed limits.
• It does not include:
  • Holding company or subsidiary company
  • Section 8 company
  • Company/body corporate governed by special Act

16. Holding, Subsidiary and Associate Company

Holding Company

• A company is holding company in relation to another company when that other company is its subsidiary.

Subsidiary Company

• A company is subsidiary if the holding company:
  • controls composition of its Board of Directors; or
  • exercises or controls more than one-half of total voting power, alone or together with subsidiaries.
• If B is subsidiary of A and C is subsidiary of B, then C is also subsidiary of A.
• Private company subsidiary of public company is treated as public company.

Associate Company

• Associate company means a company in which another company has significant influence but which is not a subsidiary.
• Significant influence means control of at least 20% of total voting power or participation in business decisions under an agreement.
• Includes joint venture company.

17. Listed and Unlisted Company

• Listed company means a company whose securities are listed on a recognised stock exchange.
• Unlisted company means a company other than listed company.
• Some prescribed classes of companies with listed or intended listed securities may not be treated as listed companies as per rules.

18. Government Company, Foreign Company and Section 8 Company

Government Company

• Section 2(45): company in which not less than 51% of paid-up share capital / total voting power is held by Central Government, State Government(s), or both.
• Includes subsidiary of such Government company.

Foreign Company

• Company or body corporate incorporated outside India.
• Has a place of business in India physically, electronically, by itself or through agent.
• Conducts business activity in India in any manner.

Section 8 Company

• Formed to promote objects such as commerce, art, science, sports, education, research, social welfare, religion, charity or environment protection.
• Uses profits for promoting its objects.
• Cannot distribute dividend to members.
• Operates under Central Government licence.
• Need not use “Limited” or “Private Limited” in its name.
• On contravention, licence may be revoked.

19. Dormant Company, Nidhi Company and PFI

Dormant Company

• Company formed for future project or to hold asset/intellectual property and has no significant accounting transaction.
• Inactive company can apply to Registrar for dormant status.

Nidhi Company

• Also known as Mutual Benefit Society.
• Main purpose: cultivate thrift and savings among members.

Public Financial Institution

• Includes specified institutions such as LIC and other institutions notified by Central Government in consultation with RBI.
• Institution may be notified if established under Central/State Act or at least 51% paid-up share capital is held/controlled by Government(s).

20. Promoter

• Section 2(69) defines promoter broadly.
• Promoter may be:
  • named as promoter in prospectus or identified in annual return;
  • person having control over affairs of company directly or indirectly;
  • person according to whose advice, directions or instructions the Board is accustomed to act.
• Persons who merely act professionally, like solicitor, banker, accountant etc., are not treated as promoters only because they helped professionally.

21. Formation of Company

22. Incorporation of Company – Section 7

• For incorporation, documents and information are filed with Registrar within whose jurisdiction the registered office is proposed.
• Key filings include:
  • Memorandum and Articles signed by subscribers
  • Declaration of compliance by professional and person named in articles
  • Declaration by subscribers and first directors regarding non-conviction, absence of fraud/misfeasance and truth of filed information
  • Address for correspondence until registered office is established
  • Particulars and proof of identity of subscribers
  • Particulars of first directors and their consent
• Registrar registers the documents and issues Certificate of Incorporation.
• Registrar allots Corporate Identity Number (CIN), which appears in the certificate.
• Company must preserve copies of incorporation documents at registered office till dissolution.
• False information or suppression of material fact can attract fraud liability under Section 447.

23. Effect of Registration – Section 9

• From the date mentioned in the certificate of incorporation, subscribers and later members become a body corporate by the company’s name.
• Registered company can exercise functions of incorporated company.
• Company gets perpetual succession.
• Company can acquire, hold and dispose of movable, immovable, tangible and intangible property.
• Company can contract, sue and be sued in its own name.
• A binding relationship arises between company and members through MOA and AOA.

24. Effect of Memorandum and Articles – Section 10

• Once registered, MOA and AOA bind company and members as if signed by company and each member.
• Members and company are bound to observe their provisions.
• Money payable by member to company under MOA/AOA is treated as debt due from member to company.

25. Classification of Capital

26. Shares

• Section 2(84): share means share in the share capital of a company and includes stock.
• A share represents an interest in the company measured by money and made up of rights contained in the contract.
• Shareholders are not part owners of company property.
• Shares, debentures and other interests of a member are movable property transferable as provided in the articles.
• Every share in a company having share capital must have a distinctive number, except shares held in depository records.

27. Kinds of Share Capital – Section 43

• Share capital of a company limited by shares may be:
  • Equity share capital
  • Preference share capital

Equity Share Capital

• Equity shares may carry voting rights.
• They may also carry differential rights as to dividend, voting or otherwise, subject to rules.

Preference Share Capital

• Preference shares carry preferential right with respect to:
  • payment of dividend, either fixed amount or fixed rate; and
  • repayment of capital in winding up or repayment of capital.
• Private company may be exempt from Section 43 if its MOA/AOA provides so.

28. Memorandum of Association (MOA)

• MOA is the charter of the company.
• It defines the constitution, powers and scope of company.
• Company cannot go beyond powers stated in MOA.
• It helps shareholders, creditors and outsiders know what company can legally do.
• MOA is a public document; persons dealing with company are presumed to know its contents.

29. Forms of MOA under Schedule I

30. Clauses of Memorandum

31. Articles of Association (AOA)

• AOA contains the company’s internal rules, regulations and bye-laws.
• It deals with internal management of company.
• It must be consistent with Companies Act and MOA.
• Company has power to alter its AOA by passing special resolution, subject to law.
• AOA cannot authorise anything contrary to MOA.

32. MOA vs AOA

33. Doctrine of Ultra Vires

• Ultra vires means beyond the powers.
• If a company does an act beyond the powers given by its MOA, the act is void.
• Such act is not binding on company.
• Company cannot sue or be sued on an ultra vires transaction.
• Shareholders cannot ratify an act ultra vires the company.
• If act is ultra vires directors but within company powers, shareholders may ratify it.
• If act is ultra vires articles but within MOA, articles may be altered and act may be regularised.

34. Doctrine of Constructive Notice

• MOA and AOA are public documents available for inspection.
• A person dealing with company is presumed to know their contents whether he actually reads them or not.
• He is presumed to know not only contents but also proper meaning of those documents.
• If a contract is beyond company powers or directors’ authority as stated in public documents, outsider cannot claim ignorance.

35. Doctrine of Indoor Management / Turquand Rule

• Doctrine of indoor management is an exception to constructive notice.
• Outsiders must check company’s public documents, but they are not expected to investigate internal procedures.
• If an act appears authorised by MOA/AOA, outsider may assume internal formalities were properly completed.
• This doctrine protects outsiders dealing with company in good faith.
• Known as Turquand Rule from Royal British Bank vs. Turquand.

36. Exceptions to Indoor Management

• Knowledge of irregularity: If outsider knew about irregularity, he cannot claim protection.
• Suspicion of irregularity: If transaction is unusual, outsider must inquire.
• Forgery: Doctrine does not validate forged documents.
• No knowledge of articles: If outsider did not rely on articles, he cannot take benefit.
• Negligence: Careless outsider cannot use this doctrine as shield.

37. Ranker Comparison Table

38. Top Exam Traps from This Chapter

• Company is separate from its members even if one person controls majority shares.
• Shareholder does not own company property.
• Common seal is optional.
• OPC requires nominee.
• Minor cannot become OPC member or nominee.
• Private company has maximum 200 members.
• Private company subsidiary of public company is deemed public company.
• Associate company requires at least 20% total voting power/control or participation in business decisions.
• Government company requires not less than 51% Government holding/control.
• Section 8 company cannot distribute dividend.
• Certificate of Incorporation creates legal personality.
• MOA defines scope; AOA defines internal management.
• Act beyond MOA is ultra vires and void.
• Constructive notice = presumed knowledge of public documents.
• Indoor management = outsider may assume internal compliance.

39. One-Page Memory Sheet