[FAQs] on Companies Act 2013

‘Lifting the veil’ means looking behind the company as a legal person i.e., disregarding the corporate entity and paying regard instead to the realities behind the legal form. Where the courts ignore the corporate personality and concern themselves directly with the members or directors, the corporate veil may be said to have been lifted.

The following are the cases where company law disregards the principle of corporate personality or the principle that the company is a legal entity distinct and separate from its shareholders or members:

1. To determine the character of the company i.e. to find out whether company is an enemy or a friend:
The Court may rend the veil for ascertaining whether a company is an enemy company. Unlike a natural person, a company does not have mind or conscience; therefore, it cannot be a friend or foe. It may, however, be characterised as an enemy company, if its affairs are under the control of people of an enemy country. For this purpose, the Court may examine the character of the persons who are really at the helm of affairs of the company, was done in the leading case of Daimler Co. Ltd. vs. Continental Tyre & Rubber Co. Ltd.

2. Company is formed to evade taxes:
Where corporate entity is used to evade or circumvent tax, the Court can disregard the corporate entity [Juggilal v. Commissioner of Income Tax AIR (SC)].

Thus where company is used as a means of evasion of taxes, then for protection of revenue of the Government, corporate veil may be lifted. [Sir Dinshaw Maneckjee Petit, Re AIR 1927 Bom. 371].

3. Company is formed to avoid a legal obligation/welfare legislation:
Where the sole purpose for the formation of the company was to use it as a device to reduce the amount to be paid by way of bonus to workmen, the Supreme Court upheld the piercing of the veil to look at the real transaction (The Workmen Employed in Associated Rubber Industries Limited, Bhavnagar v. The Associated Rubber Industries Ltd., Bhavnagar and another).

4. Formation of subsidiaries to act as agents:
A company may sometimes be regarded as an agent or trustee of its members, or of another company, and may therefore be deemed to have lost its individuality in favour of its principal & the disqualifications of the principal shall be treated as that of the agent. Here the principal will be held liable for the acts of that company, as was held in the case of Merchandise Transport Limited v. British Transport Commission (1982).

5. Company formed for fraud/improper conduct or to defeat law:
The corporate veil may be lifted if the company is formed to – (a) defeat the law; (b) defraud creditors; (c) avoid legal obligations (arising by way of a contract). Where the device of incorporation is adopted for some illegal or improper purpose, e.g., to defeat or circumvent law, to defraud creditors or to avoid legal obligations. [Gilford Motor Co. v. Horne & Jones v. Lipman]

6. To determine the technical competence of the company:
A company is an artificial entity and therefore it cannot be judged for competence and experience. In some cases where the technical competence of the company is to be ascertained, such as to determine eligibility of company for certain contract, then the experience, qualification and competence of the members shall be treated as that of the company. Thus corporate veil shall be lifted as was done in the case of New Horizons Ltd. v. UOI (1997).

One person company

Section 2(62) of the Companies Act, 2013 defines one person company (OPC) as a company which has only one person as a member. The following are the rules regarding membership of OPC:

• There can be only one person as member of OPC.
• The memorandum of OPC shall indicate the name of the other person, who shall, in the event of the subscriber’s death or his incapacity to contract, become the member of the company.
• The other person whose name is given in the memorandum shall give his prior written consent in prescribed form and the same shall be filed with Registrar of companies at the time of incorporation.
• Such other person may be given the right to withdraw his consent.
• The member of OPC may at any time change the name of such other person by giving notice to the company and the company shall intimate the same to the Registrar.
• Any such change in the name of the person shall not be deemed to be an alteration of the memorandum.
• Only a natural person who is an Indian citizen whether resident in India or otherwise and has stayed in India for a period of not less than 120 days during the immediately preceding financial year-

– shall be eligible to incorporate a OPC;
– shall be eligible to be a nominee for sole member of a OPC.

• No person shall be eligible to incorporate more than one OPC or become nominee in more than one such company.
• No minor shall become member or nominee of the OPC or can hold share with beneficial interest.

“Company limited by guarantee” means a company having the liability of its members limited by the memorandum, to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.

These companies may or may not have a share capital. In the case of a guarantee company with a share capital, the members are required to purchase shares of fixed amount and also give a guarantee for a further sum in the event of winding up. Generally, guarantee companies are formed for non-trading purposes. Such as promotion of commerce, art, science, sports etc., and do not aim for profit. The Chambers of Commerce, charitable institutions, sport clubs, are generally organized as guarantee companies.

The common features between a ‘guarantee company’ and ‘the company having share capital’ are legal personality and limited liability. In the latter case, the member’s liability is limited by the amount remaining unpaid on the share, which each member holds. Both of them have to state in their memorandum that the members’ liability is limited.

The Memorandum of Association of a company is regarded as its foundation which expresses the purpose of incorporation of the company and also spells out the conditions within the purview of which it is permitted to be formed & run its operations. The MOA not only defines the powers of the company proposed to be formed but in doing so also delimits/confines its powers. A company can enter only into those transactions & operations which are expressly permissible in the object clause of MOA or which are considered as ancillary or facilitative to the accomplishment of the expressly stated objects. Any transaction which falls beyond the scope of powers confessed by the MOA shall be regarded as ultra vires and therefore void ab initio.

The MOA can be truly regarded as constitution or charter of the company since it defines the scope of powers conferred on an artificial legal person i.e. a company. The MOA not only provides a clarity to the shareholders with respect to the purposes for which their contributed capital shall be utilised by the company but also provides the outsiders & dealing with the company, the certainty as to the nature & scope of their contractual relationships.

The following are the contents of MOA:

(i) Name clause – It states the name of the company. The name of a Public company must have ‘Limited’ as its last word, whereas the name of a private company must end with the word – ‘Private Limited’.

(ii) Registered office clause – This clause must specify the name of the state in which the R.O of the company is proposed to be situated. The complete address of the company need not be mentioned in the MOA.

(iii) Object clause – The MOA of a company must state with clarity the purpose or the objects for which a company is proposed to be incorporated. It may also state such other objects which are necessary for accomplishment of main objects.

(iv) Liability clause – This clause expressly states the extent of liability of the members of the company. The liability of members shall be limited to the unpaid value of the share capital held by them, in case of a company limited by shares. Whereas in case of a company limited by guarantee the liability of the members shall be limited upto the amount guaranteed by them to be contributed on the event of winding up of the company.

(v) Capital clause – This clause in MOA of a company having share capital states the amount of share capital with which a company is proposed to be incorporated. The clause also states the number and type of shares in which the capital is divided into as well as the fixed amount or value of each share.

The number of shares that each subscriber to the MOA undertakes to subscribe must be indicated opposite his name. [at least 1 share]

According to provisions of the Companies Act, 2013, section 8 deals with the formation of companies which are incorporated to promote the charitable objects of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment etc. Such company intends to apply its profit in promoting its objects and prohibits the payment of any dividend to its members. Examples of section 8 companies are FICCI, ASSOCHAM, National Sports Club of India, etc.

Significant points of section 8 Companies which distinguish it from other companies:

• It is formed only for the promotion of commerce, art, science, religion, charity, protection environment, sports, etc.
• It uses its profits only for the promotion of the objective for which formed.
• It does not declare dividend to members.
• The requirement of minimum share capital does not apply.
• It operates under a special licence from Central Government, subject to certain conditions, and the license entitles it to avail certain privileges in comparison to other companies.
• It need not use the word Ltd./Pvt. Ltd. in its name and can adopt a names such as club, chambers of commerce etc.
• The licence can be revoked if the conditions subject to which it was issued are, contravened. On revocation, Central Government may direct it to – convert its status and change its name i.e. (add Ltd./Pvt. Ltd.) or may order it to wind-up or amalgamate with another company having similar objects, on such terms as the CG may deem appropriate.
• A section 8 company can call its general meeting by giving a clear 14 days’ notice instead of 21 days.
• The requirement of minimum number of directors, independent directors etc. does not apply to a section 8 company.
• It need not constitute a Nomination Committee, Remuneration Committee and Shareholders’ Relationship Committee.
• A partnership firm can be a member of section 8 Company.

The term ‘Capital’ has a variety of meanings. It means one thing to economists; another to accountants and still another to businessmen and lawyers. In relation to a company limited by shares, the word capital means share-capital, i.e., the capital or figure in terms of so many rupees divided into shares of fixed amount. In other words, the contributions of persons to the common stock of the company form the capital of the company. The proportion of the capital to which each member is entitled, is his share. A share is not a sum of money; it is rather an interest measured by a sum of money and made up of various rights contained in the contract.

In the domain of Company Law, the term ‘capital’ is used in the following senses:

(a) Nominal or authorised or registered capital: This form of capital has been defined in section 2(8) of the Companies Act, 2013. “Authorised capital” or “Nominal capital” means such capital as is authorised by the memorandum of a company to be the maximum amount of share capital of the company. Thus, it is the sum stated in the memorandum as the capital of the company with which it is to be registered being the maximum amount which it is authorised to raise by issuing shares, and upon which it pays the stamp duty. It is usually fixed at the amount, which, it is estimated, the company will need, including the working capital and reserve capital, if any.

(b) Issued capital: Section 2(50) of the Companies Act, 2013 defines “issued capital” which means such capital as the company issues from time to time for subscription. It is that part of authorised capital which is offered by the company for subscription and includes the shares allotted for consideration other than cash.

Schedule III to the Companies Act, 2013, makes it obligatory for a company to disclose its issued capital in the balance sheet.

(c) Subscribed capital: Section 2(86) of the Companies Act, 2013 defines “subscribed capital” as such part of the capital which is for the time being subscribed by the members of a company.

It is the nominal amount of shares taken up by the public. Where any notice, advertisement or other official communication or any business letter, bill head or letter paper of a company states the authorised capital, the subscribed and paid-up capital must also be stated in equally conspicuous characters. A default in this regard will make the company and every officer who is in default liable to pay penalty extending ` 10,000 and ` 5,000 respectively. [Section 60].

(d) Called-up capital: Section 2(15) of the Companies Act, 2013 defines “called-up capital” as such part of the capital, which has been called for payment. It is the total amount called-up on the shares issued.

(e) Paid-up capital: It is the total amount paid or credited as paid-up on shares issued. It is equal to called-up capital less calls in arrears.

A company can be incorporated by complying with the formalities prescribed u/s 7 of the Companies Act, 2013. Application in the prescribed form must be made, along with the documents prescribed for this purpose and fees, to the Registrar within whose jurisdiction, the registered office of the company is proposed to be situated. The Registrar on being duly satisfied as to the compliance of all the requirements, relating to incorporation of a company, as prescribed under the Companies Act, 2013 and the rules made thereunder, shall register all the documents and information in the register and issue a certificate of incorporation in the prescribed form to the effect that the proposed company is incorporated under this Act. The certificate of incorporation shall also indicate the unique identity number allotted to the company i.e. the Corporate Identity Number, which shall be a distinct identity for the company.

When a company is registered and a certificate of incorporation is issued by the Registrar, following important consequences follow:—

1. The company becomes a distinct legal entity. Its life commences from the date mentioned in the certificate of incorporation.
2. It becomes a body corporate and it acquires a perpetual succession.
3. It is capable of suing and be sued in its corporate name.
4. Its property is not the property of the shareholders. The shareholders have a right to share in the profits of the company when realized and divided. Likewise any liability of the company is not the liability of individual shareholders.

From the date of incorporation mentioned in the certificate, the company becomes a legal person separate from the incorporators; and there comes into existence a binding contract between the company and its members as evidenced by the Memorandum and Articles of Association. It has perpetual existence until it is dissolved by liquidation or struck out of the register.

A legal personality emerges from the moment of registration of a company and from that moment the persons subscribing to the Memorandum of Association and other persons joining as members are regarded as a body corporate or a corporation in aggregate and the legal person begins to function as an entity. A company on registration acquires a separate existence and the law recognises it as a legal person separate and distinct from its members.

Small company given under the section 2(85) of the Companies Act, 2013 which means a company, other than a public company—

(i) paid-up share capital of which does not exceed 2 crore rupees or such higher amount as may be prescribed which shall not be more than 10 crore rupees; and

(ii) turnover of which as per its last profit and loss account does not exceed 20 crore rupees or such higher amount as may be prescribed which shall not be more than 100 crore rupees:

Exceptions: This section shall not apply to:

(A) a holding company or a subsidiary company;

(B) a company registered under section 8; or

(C) a company or body corporate governed by any special Act.

Where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.

“Inactive company” means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years.

“Significant accounting transaction” means any transaction other than—

(i) payment of fees by a company to the Registrar;

(ii) payments made by it to full the requirements of this Act or any other law;

(iii) allotment of shares to full the requirements of this Act; and

(iv) payments for maintenance of its office and records.

Listed Company: As per the definition given in section 2(52     ) of the Companies Act, 2013, it is a company which has any of its securities listed on any recognized stock exchange.

Provided that such class of companies, which have listed or intend to list such class of securities, as may be prescribed in consultation with the Securities & Exchange Board, shall not be considered as listed companies.

Unlisted Company: Under the provisions of Companies Act, 2013 unlisted company means a company other than a listed company.

Formation of companies with charitable objects etc. (Section 8 company)

Section 8 of the Companies Act, 2013 deals with the formation of companies which are formed to—

• Promote the charitable objects of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment etc.
• Such company intends to apply its profit in promoting its objects and
• Prohibiting the payment of any dividend to its members.

Examples of section 8 companies are FICCI, ASSOCHAM, National Sports Club of India, CII, etc.

Power of Central Government to issue the license—

(i) Section 8 allows the Central Government to register such person or association of persons as a company with limited liability without the addition of words ‘Limited’ or ‘Private Limited’ to its name, by issuing licence on such conditions as it deems fit.

(ii) The Registrar shall on application register such person or association of persons as a company under this section.

(iii) On registration the company shall enjoy same privileges and obligations as of a limited company.

Note: Central Government has delegated the power to grant license to the ROC.