Author: Dibya Nanda, Research Associate
A legal regime is nothing but a system of principles and rules governing something, and which is created by law. Every aspects of human life are governed by some kind of rules or regulations, be it social, political, personal or economical. Company is a very important part of economic aspects of human life. The branch of law which exclusively deals with all matters relating to companies, such as incorporation, management, allotment of shares, winding up etc., is termed as Company Law.
In India, the Company law is governed by the Companies Act, 1956, which came into force on 1st April, 1956. The object of the Act states it as an Act to consolidate and amend the law relating to companies and certain other associations in India.
As the matter with most of the other areas of Indian law, the Indian Company law also owes its origin to its Colonial rulers. The concept of company law is developed as per the principles of the Company laws of England. Before British colonization, India was basically an agrarian country. But the growth of commerce and trade during the British rule, made it necessary for the enactment of a legislation governing the matters relating to companies and therefore, the Joint Stock Companies Act, 1850 was passed for providing registration of joint stock companies in India. Indian Companies Act was enacted for the first time in 1866. This Act was amended many times subsequently. Then finally, the Companies Act, 1956 was enacted by the Government of India, following the recommendations of Company Law Committee under the chairmanship of Shri C.H. Bhabha.
What is a company- Definition and Essential Characteristics?
To learn about the legal regime, governing the companies, we need to know what exactly the term ‘company’ means. Though in common sense, ‘company’ may mean the association of two or more persons. But in legal sense, as defined under the section 3(1) (i) of the Companies Act, 1956, a Company means a company formed and registered under this Act or an existing company. An existing company means a company formed and registered under any of the previous companies’ laws1. The previous companies’ laws are:
- The Indian Companies Act, 1866
- The Indian Companies Act, 1882
- The Indian Companies Act, 1913
- The Registration of Transferred Companies Ordinance, 1942
- Any other acts prior to the Indian Companies Act, 1866, relating to the companies.
- Any other regional laws relating to the companies.
The essential characteristics of a company are
- Artificial Legal Personality: A company is considered as a person under the law, having rights and duties. But company is not a natural person like humans as it does not have a body, soul etc. Thus, it is an artificial person created by law. The company can be held liable for statutory violation like an individual, but it cannot be imprisoned2.
- Separate Legal Entity: A company has different and independent existence in law from its members. It is capable of performing different commercial functions separately like owning properties, incurring debts, entering into contracts etc. A member cannot be held liable for the wrongful acts of the company, even if he’s the majority shareholder of the company.
- Perpetual Succession: A company never ceases to exist and is not affected by death, insolvency, mental incapability of its member. The membership may change from time to time, but company continues. The company can only be come to an end through process of law, i.e. through the provisions of the Companies Act, 1956.
- Capacity to sue and being sued: Company is a separate legal person in the eye of law. Therefore, it can sue others in its own name or can be sued by others for breach of statutory or contractual obligations.
- Common Seal: Being an artificial legal person, company cannot sign its name. So it uses a common seal, which has its name engraved in it as the official signature of the company. The common seal provides authenticity to the documents of the company.
- Limited Liability of the Members: Unlike partnership firms, members of the company do not required to pay the creditors’ due from personal assets. Their liability is limited to the amount due on the shares held by them. Thus, if the shares are paid up fully, the members does not have any liability.
- Free Transferability of the Share: The shares of a company are freely transferable, i.e. they can be freely purchased and sold in the share market, like any other movable property, as per the articles of the company3. This provides liquidity to the investor and stability to the company.
Kinds of Companies and their Features
Though the companies can be classified into many kinds, but in this article, we are going to focus on four important kinds of companies. They are:
- Public Companies
- Private Companies
- Government Companies
- Public Sector Undertakings
Section 3 (1) (iv) of the Companies Act, 1956 defines the term public company. As per the section, “public company” means a company which is not private and has a minimum paid up capital of five Lakh rupees or such higher paid-up capital, as may be prescribed. The articles of association of a public company do not contain the restriction of making it a private company. A public company is formed by registering with the Registrar of Companies (ROC) and can be wound up under the provisions of the Act.
Important features of a public company:
- It must have a minimum of seven shareholders and a minimum of three directors and maximum of 12 directors. There is no restriction of the maximum of the shareholders and on the transfer of shares. A public company can invite the members of general public to subscribe the shares.
- The company is managed by the Board of Directors and the decision making power is vested as per the rule of majority.
- Being a public company, its financial status is disclosed to the public.
- The liability of each shareholder is limited to the extent of the unpaid amount of the shares’ face value.
- A private company which is subsidiary of a public company will be treated as public company as per the Act.
The “private company” is defined under the Section 3 (1) (iii) of the Companies Act, 1956 as a company which has a minimum paid up capital of one-Lakh rupees or higher paid-up capital as may be prescribed. Its articles of association contain certain restrictions. A private company must be incorporated with the Registrar of Companies (ROC) can be wound up under the provisions of the Act.
Important features of a private company:
- It must have a minimum of two and a maximum of 50 members as its shareholders and minimum of two and maximum of 12 directors. It restricts transfer of its share. The company cannot invite the general public to subscribe its shares nor can it accept deposits from persons other than its members, directors and their relatives.
- Several exemptions are granted to a private company as per the Act like exemption for making statutory report, for obtaining Certificate for Commencement of Business etc.
- The directors of the private company do not face any restrictions as that of the public company.
- The liabilities of the share holders are limited to the shares subscribed by them. But sometimes, the liability of a Director/Manager can be unlimited.
The private company can be converted into a public company under the provisions of the Act. There are three procedure of conversion, conversion by default i.e., non-compliance with the restrictions in the articles of association (Section 43), conversion by operation of law (Section 43A), conversion by choice i.e., alteration in the articles of association (Section 44).
Under Section 617 of the Companies Act, 1956, the “government company” means 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. It also includes a company which is a subsidiary of a Government company. The government company can be a private or public company.
Important features of a government company:
- The government company is managed by the directors, as appointed by the shareholders. Government being the majority shareholder appoints the directors.
- The provisions of the Companies Act, 1956, are applicable to the government company. But the Central Government can grant some exemptions, by notification on the Official Gazette.
- The auditors of a Government company are appointed or re-appointed by the Controller and Auditor-General of India, to whom they submit the audit report. The CAG can comment upon or supplement the audit.
- If the government company is instrumentality or agency of the Government, it would be an ‘authority’ within the meaning of Article 12 of the Constitution and can be liable against writ petitions.
- RTI is applicable to the government company.
Public Sector Undertakings
The government-owned are termed as public sector undertakings (PSUs) in India. In a PSU majority i.e. 51% or more of the paid up share is held by central government or by any state government or partly by the central governments and partly by one or more state governments.
Important features of PSUs:
- The PSUs are owned, managed, controlled and funded by the Government and are basically welfare oriented.
- PSUs includes public corporation, which are established by a special act of parliament or state legislature or government companies, as defined under Section 617 of the Companies Act, 1956. It also includes Departmental Undertakings like Railways, which provides essential services and function under respective ministries of Government of India or autonomous bodies registered under Societies Registration Act, 1860.
- The shares of PSUs are open to the general public for purchase.
- PSUs are legal entities and hence can sue others and can also be sued.
- Most profitable PSUs are called Maharatnas and Navratnas.
The major difference between a PSU and a government company is shares of a PSU can be subscribed by the general public.
These are the basic concepts of legal regime governing the company related matters in India. But then the question arises, why we need these legal principles. Law brings order in the chaotic society. Similarly in the corporate world, law is needed to ensure fairness and equity in business dealings. Someone’s profit can be another’s loss. Our societies, especially the sphere of corporate are full of conflicting interests and regulations are needed to control the behavior of the people. In this scenario, company law along with other legal regimes in fields of corporate, helps in ensuring harmonious and peaceful co-existence among the different players, both big and small and serves as norm of conduct.