Basics of Company Law

Legally when you start a business, you must decide on the type of entity or form of organisation. Even when applying for a ¹trademark, whether it is you who is applying or your entity which is applying matters a lot for your business.

Forms of entities

Informal Business Organisation:

1. Sole Proprietorship

Any Individual doing a business is called "Sole Proprietorship".

Note - One Person Company (OPC) with limited liability is formed under the Companies Act, 2013, which is in no way connected with this, as sole proprietorship has ³unlimited liability

Any ²commercial venture when started by an individual alone is by default, a sole proprietorship business. Permanent Account Number (PAN) given for every person (can be in individual's name or entity name or trademark) under the Income Tax Act, 1961 is the common form of registration used as an identity by sole proprietors for opening bank accounts for their business as there is no entity-specific registration requirement.

Sole Proprietorship can be started by only ONE individual/owner/natural person. However, it can have any many employees. When individuals as a family (by birth) come together, it becomes a Hindu Undivided Family (HUF) whereas individual/person (who are not family, by birth) comes together, the other forms of business entities emerge!

2. Partnership

Any 2 or more ⁴persons participate in the business is called "Partnership", which is created by an agreement.

Note - Limited Liability Partnership (LLP) is formed under the Limited Liability Partnership Act, 2008, which is in no way connected with this, as partnership has unlimited liability.

3. Others

Association of Persons (AOP) or Body of Individuals (BOI): Like Sports Associations, Trade Unions, etc..., a group of Persons coming together for mutual benefit or common purpose is called "AOP" or "BOI", which is having a SEPARATE IDENTITY from its Members. The Native Share & Stockbrokers' Association (of persons/brokers) started in 1875, later became the Bombay Stock Exchange (BSE) Limited.

Informal Non-Profit Organisation:

1. Trust

When a Property is held by persons as Trustee for the Benefit of another, it can be regarded as Private Trust, which are governed by Indian Trust Act, 1882, whereas Public Trust are governed by the respective State Governments.

2. Society

Society registered under the Societies Registration Act, 1860 is an AOP, a Legal Entity or a Juridical Person.

Note - A trust or society may be registered under the respective law or formed under Section 8 of the Companies Act, 2013

Formal Business Organisation:

1. Company (limited)

A Company is an artificial personal created by the process of law (the Companies Act, 2013) and hence can only be destroyed by the process of law.

2. Limited Liability Partnership (LLP)

LLP is created under the Limited Liability Partnership Act, 2008, which has all the benefits of partnership firm (simple procedures) and features of company (like body corporate, perpetual succession).

3. Co-operative Society

Forming a Co-operative Society to do business ONLY among its Members, this is governed under the Co-operative Societies Act, 1912 [which respective State regulates]. It is to promote the economic interest of their members and hence, every member has Only ONE VOTE irrespective of shareholding. Under the Multi-State Cooperative Societies Act, 2002 (MSCS), which is a Central Act, multi-state cooperative society can be formed whose objects & functions spread over to SEVERAL STATES, which is a body corporate with limited liability.

Formal Non-Profit Organisation:

- Section 8 Company (limited)

Though these entities are formed for promoting commerce, arts, science, religion, charity or useful object (just like Trust or Society), these are called "Section 8 Company" (created under the Companies Act, 2013), which do not share the profits made, rather put back in furtherance of objects. https://www.icsirvo.in/ ICSI Registered Valuer Organisation is a Section 8 company

Choice of Business Organisation:

When choosing an entity for your business, one shall take into consideration of the LIMITED LIABILITY & whether for COMMERCIAL purpose or NOT, the SIZE of operations, CAPITAL requirement and TAX benefits, thus:

• An individual who is fine with unlimited liability can consider Sole Proprietorship or Body of Individuals whereas hes cautious can choose One Person Company!

• Any person coming together, who is fine with unlimited liability can consider Partnership or Association of Persons whereas he’s cautious can choose an LLP or a Company!

• Any person coming together with motive of Limited Liability but with co-operative principles, have MSCS whereas he thinks to protects his members, there's always a Trusts and would like to service the PUBLIC with non-commercial motive, can form a Society!

Basis the above, answer the following question:

If you started a business, when you are studying in college and your wealthy friend has given you some money, then which is the ideal form of business organisation?

Any formal business organisation comes with its own responsibilities. Hence choosing an informal business organisation is ideal in the initial stages. Once the size of operations, turnover or profit goes up, one can start a formal business organisation. Hence, if you are considering your wealthy friend as a lender or partner, you can go for Sole Proprietorship or Partnership, respectively!

The Companies Act, 2013:

- [ i ]. What is the spirit of the Company Law?

  The intention or spirit of the company law should be kept in the back of the mind, while reading any of the provisions of the company law is PROTECTION of the investors, creditors and public interest.

- [ ii ]. What does the Bare Act on Company Law contain?

  The Bare Act is the exact text of the Act passed in the Parliament and assented by the President of India. The following is the extract of the Bare Act on Company Law, including the Section 1 of the Companies Act, 2013. This mentions that it is the 18th Act passed in the Parliament in the Year 2013, by consolidating and amending the Previous Company Laws from the Indian Companies Act, 1866 till the Companies Act, 1956.

The Companies Act, 2013 has 470 Sections, which is divided into XXIX Chapters and there are VII Schedules (as detailed in the table below). Sections 253 to 378, as covered in Chapters XIX, XX and XXI deals with winding up, which is read with the Insolvency and Bankruptcy Code (IBC), 2016, as the created company can only be destroyed by the process of law. Further, the Ministry of Corporate Affairs (MCA) prescribes the Companies Rules for every Chapter and beyond, by giving the secretarial practices and procedure to implement the law. For instance, the Companies (Incorporation) Rules, 2014 provides the steps to form a company. This Companies Acts and Rules can be accessed through Companies Bare Act

iii. What is the significance of the type of entity or form of organisation with respect to the "number of persons" doing a business together?

"No association or partnership shall be formed, consisting of more than fifty persons for the purpose of carrying on any business that has for its objects the acquisition of gain by the association or partnership or by individual members thereof, unless it is registered as a company under the Act or is formed under any other law for the time being in force."

a) When 2 or more persons carry on a business as an AOP or BOI or Partnership, they shall have a maximum of 50 persons only;

b) When more than 50 persons carry on a business, it should be created as a Company only.

c) If more than 50 persons carry on a business together without forming a Company, it will be considered as an "Illegal Association".

Basis the above, answer the following questions:

✓ What if HUF carries on business, has more than 50 family members?

✓ What if a College Alumni Association has more than 50 members?

Hindu Undivided Family (HUF) will have individuals (who attained the age of majority) in a family (by birth). HUF is considered as a single legal person and hence the limit of number 50 will not apply to a HUF. College Alumni Association is generally registered as a Trust or Society. It is neither a business nor has the object of acquisition (or sharing) of gain and hence the limit of number 50 will not apply.

iv. Why Section 2 of any Act or Law should be referred while going through any of the provisions of the Act or Law?

Section 2 of the Companies Act, 2013 or most of the Act or Law provides for a definition of the "words" or "terms" used in the Act or Law, given in Alphabetical order. It acts like a Dictionary while reading the particular Act or Law. It contains interpretations of words or terms used in the Act or Law. If any particular term is not defined under Section 2, then we have to refer the definition, if any under the General Clauses Act, 1897 to be referred. For instance, the word "person" is not defined under Section 2 of the Companies Act, 2013 and hence, when you refer the General Clauses Act, it provides the following: "Person" shall include any company or association or body of individuals, whether incorporated or not. Similarly, the Government has now replaced the Indian Criminal Laws as under, in all laws by publishing a notification in the ⁵Official Gazette (given below) under the General Clauses Act to update new Act names in all Acts or Law. For instance, the Tribunal shall be "⁶deemed to be civil court" for the purpose of IPC and CrPC shall be read as BNS and BNSS respectively:

v. What are the major types of definition under the Companies Act, 2013?

There are 3 major types of definition:

i. Means (=) or Exhaustive definition

ii. Includes (+) or Inclusive definition

iii. Do not include (-) or Narrowing definition

Section 2(20) of the Companies Act, 2013 defines company as: "company" means a company incorporated under this Act or under any Previous Company Law; Mathematically, Company = company under this Act or Previous Law. Section 2(11) of the Companies Act, 2013 defines body corporate as: "body corporate" includes a company incorporated outside India, but does not include-

(i) a co-operative society registered under any law relating to co-operative societies; and

(ii) any other body corporate, notified by the Central Government. Mathematically, Body Corporate + company incorporated outside India + LLP + Company incorporated in India (-) co-operative society (-) notified body corporate.

Basis the above, answer the following questions:

1. Can LLP be considered as a Company, as per the definition of company?

2. How can one include company incorporated in India also in the definition of body corporate?

3. Whether co-operative society is a body corporate?

Whenever it is an exhaustive definition with the word "means", one cannot enlarge it to include related words. Hence, company definition cannot include LLP. Company means company only. For an inclusive definition with the word "includes", one can enlarge it to include related words as long as it is not excluded. Hence, body corporate can be enlarged to include (+) company incorporated in India or Limited Liability Partnership (LLP) or Public Financial Institutions or Banks. For narrow definition with the word "do not include", one has to exclude the listed words. Co-operative society, though is a legal person, cannot be called as body corporate.

vi. How to identify a company from its name?

Check whether the name of the Company, ends with:

• [ ] "Private Limited" or (P) Limited, then it is a Private Company.
• [ ] "OPC Private Limited", then it is a One Person Company (OPC).
• [ ] "Limited" or Ltd, then it is a Public Company.
• [ ] "Limited Liability Partnership" or LLP, then it is an LLP.
• [ ] ⁷"Producer Company Limited", then it is a Producer Company .
• [ ] None of the above-mentioned words like "Limited", then it may be an Unlimited Company or Section 8 Company. Visitand find the "Master Data Services" tab and search the name of company, say "CSI Registered Valuer Organisation", if it is not found, then it may not be a company, rather it could be any of the Informal Organisation. If it is found and when you check the "Category", "Sub Category" and "Class of the Company, you will get to know whether it is a company or company limited by shares or guarantee or both or Unlimited Company. If it is not mentioned as an Unlimited Company, still you do not find the words "Limited", like in the case of "ICSI Registered Valuer Organisation", it has to be a Section 8 company! Identify whether these can be called as "company", from the sign boards given below and if yes, find the "Category", "Sub Category" and "Class" of the Company.

vii. Leading Prompts

1. Whether you found Sign & Banner Design Co. or Impetus Techknows in MCA Master Data?
2. Whether "MSME unit" means a form of business organisation?
3. Whether ® "R" in circles denote, it is a registered business organisation?
4. If instead of ® "R" in circles, there is™"TM" in circles, whether it denotes a registered Trademark?
5. What could be the type of organisation if Sign & Banner Design Co. is not found in MCA Master Data?
6. What could be type of organisation if Impetus Techknows is not found in MCA Master Data?
7. How to find the Company Name to search in the MCA Master Data? Like for instance, find the Company Name from www.olacabs.com portal?

viii. What are the features of a company? (or) What is the general meaning of the term "body corporate"?

CORPORATE LEGAL PERSONALITY

• BRAIN = ⁸DIRECTORS and when they join together, the Board of Directors, who collectively take decisions at a Board Meeting of the Company.

• BODY = ⁹MEMBERS , they meet together at the General Meeting of the Company and give approvals based on the disclosures made by the Board of Directors.

A Company being an artificial legal person, has its own Corporate Legal Personality with the following features:

a) Artificial person: Because a company is created under the Companies Act, 2013;
b) Legal person: one who can file a SUIT (legal case) against another and against WHOM a suit can be filed IN ITS OWN NAME.  A legal person can HOLD or TRANSFER property in ITS OWN NAME.
c) Separate legal entity: Separation of RISK & OWNERSHIP in a company:
i.Assets of the Company are not assets of the Members;
ii.Assets of the Members are not assets of the Company.

A creditor of the company can only take the assets of the Company for settlement of loans or claims. Thus, the Company is a separate legal entity, distinct from its Members.

d) Perpetual (forever) succession: Members are shareholders holding shares in the Company and someone will remain in the Company, as following can happen:

i. By Act of Parties: Members can transfer their shares in ¹⁰demat or physical mode. In such case, the transferee will become the member of the Company

ii. By Operation of Law: If a member dies or becomes an ¹¹insolvent, automatically by operation of law, his legal representatives or assignees will become the member of the Company.

Thus, members may change but company will continue to exist forever.

e) Limited Liability: It is the liability of a member to a company, which is limited (i.e) you have to pay AS MUCH AS you have AGREED TO PAY.

KSA inspired illustration: Presume A has subscribed for 100 shares in a company and the nominal value of the shares is Rs. 10 each. So far A has paid Rs. 6/- on each share. The balance Rs. 4/- on each share, he is bound to pay AS & WHEN the Company makes the call. It may be during the lifetime of the company or when the company is being wound up. But what is the extent of A's liability on each share? ONLY THE BALANCE OF Rs. 4/- on each share and NOTHING MORE. This is the meaning of LIMITED LIABILITY, which the shareholder/member enjoys in a Company.

f)Common Seal: Traditionally, company's SIGNATURE is used in share certificates, debenture, bonds and [^12]power of attorney (POA), by taking an authorisation from the Board of Directors of the company, which is called COMMON SEAL of the company.  A common seal is kept under SAFE CUSTODY and will have the NAME of the company ENGRAVED in it and when affixed, it will EMBOSS the same in the documents, such that the legal person has SIGNED.  Now, common seal is made OPTIONAL for affixing, as may be determined by way of its articles of association.

ix. What are the provisions of Section 2 defining a Private Company, OPC, Startup, Small Company, Public company, Listed Company, Holding and Subsidiary company, Government Company and Foreign Company?

Private Company:

It means a company with paid-up share capital and through its ¹²Articles of Association (AOA):

a. RESTRICTS - the right to transfer its shares

b. LIMITS - no. of members to 200 (excluding present and past employees)

c. PROHIBITS - any invitation to the public to subscribe for any securities of the company;

Assume, Zoho Corporation Private Limited (Zoho) has 5 directors, 100 shareholders and 1000 employees. Zoho decided to offer Employee Stock Options (ESOP) to all their employees, by which they are entitled to get 100 shares each, over a period of 4 years, if they continue in Zoho. ESOP’s are option to get 100 shares after 4 years. Around 500 employees exercised their options and got 100 shares each after 4 years. One of the director of Zoho informed the Board of Directors that Zoho has violated the Articles of Association by converting ESOP's into shares. A private limited company cannot have more than 200 members, now Zoho has existing 100 shareholders with 500 employee shareholders, totalling to 600. Please advise. Present or past employees, who become shareholders by exercising ESOP's are not counted for the limit of 200 members and hence Zoho has not violated the Articles of Association. Note: Private Company which are OPC, Small Company and Startup, which has simplified compliance requirements, as compared with other Private Company.

One Person Company (OPC):

It means a private limited company with only 1 shareholder. A private limited company is required to have a minimum of 2 shareholders. However, OPC shall have just 1 shareholder, who shall be an "Individual Indian Citizen", as the subscriber to the ¹³Memorandum of Association (MOA) and can have 1 to 15 directors. The 1 shareholder should nominate one other Individual Indian Citizen, who shall become a shareholder, in case of death or his ¹⁴incapacity to contract. This is to ensure perpetual succession of OPC.

Can an artificial person like a Company, start an OPC? Or Can Zoho Corporation Private Limited, being a person start an OPC? No, as OPC can be started by an Individual Indian Citizen only.

Startup:

It is a private limited company, which is WITHIN 10 years of ¹⁵incorporation and turnover UPTO Rs. 100 crores in any of the financial year. Such startup should be innovative and have scalable business, which can be expanded across the world. An entity formed by splitting up or reconstruction of an existing business shall not be considered a "Startup". Startups require a separate registration under the Department for Promotion of Industry & Internal Trade (DPIIT) through

Small Company:

It means a private company with paid-up share capital UPTO Rs. 4 crores and turnover UPTO 40 crores (as per the last ¹⁶financial year). However, the following cannot be a small company:

✓ Holding or Subsidiary Company

✓ Section 8 Company

✓ Company under Special Act, like LIC under the Life Insurance Corporation Act, 1956.

Public Company:

It means a company, which is not private limited company, (ie) the articles of association will allow:

✓ Free Transferability of shares (without any restrictions)

✓ Maximum no. of members can be unlimited (without any limitations)

✓ any invitation to the public to subscribe for any securities of the company, however, if such invitation is made, it shall become a "Listed Company".

Note: A private subsidiary of a Public Company is also a Public Company, for the purposes of compliance under the Companies Act, 2013.

ZOMATO PROSPECTUS FOR IPO Prospectus is the invitation to the public to subscribe for any securities of the company. This process is called an Initial Public Offer. Zomato was a public company when it did an IPO and subsequently became a listed company by raising funds from public.

Listed Company: It is a public company, which has listed its ¹⁷equity shares in a stock exchange [Bombay Stock Exchange (BSE) or National Stock Exchange (NSE)]. Whenever a public company raises funds from public, it shall become a listed company. Listed company is regulated by both the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI).

Holding & Subsidiary Company:

1. If Holding Company controls the board of directors of a company, then such company is its Subsidiary (ie) if the Holding Company can appoint or remove all or majority of board of directors in its Subsidiary.
2. If Holding Company controls MORE THAN 50% of total ¹⁸voting power of a company, then such company is its Subsidiary. The Holding Company can control directly or through any of its subsidiaries as well.
3. Subsidiary of subsidiary is the subsidiary of Holding Company.
4. A Holding Company can have only 2 levels of subsidiary below it.

Assume, Reliance Brands Limited (RBL) and Reliance Lifestyle Products Private Limited (RLPP) are subsidiaries of Reliance Retail Ventures Limited (RRVL), which is a subsidiary of Reliance Industries Limited (RIL). Whether Reliance Brands Limited (RBL) and Reliance Lifestyle Products Private Limited (RLPP) are 2nd and 3rd level subsidiaries? No, as both RBL and RLPP are subsidiaries of Reliance Retail Ventures Limited (RRVL) at the same (2nd) level. Had RBL been a subsidiary of RLPP, then it would have become a 3rd level subsidiary, which cannot exist. Whether both RBL and RLPP are public companies? Yes, RLPP is though a private company, it is considered as a public company as it is a subsidiary of a public company. Whether RBL is a subsidiary of RIL? Yes, RBL is the subsidiary of RRVL, which is a subsidiary of RIL, hence RBL becomes the subsidiary of RIL as well.

Government Company:

It means a company in which 51% or more of paid-up share capital or total voting power is held by:

✓ Central or State Governments or

✓ Partly by Central or State Governments and includes:

✓ Subsidiary of Government company is a Government Company. Government company is not Government as it is a separate legal entity. Indian Railway Catering and Tourism Corporation (IRCTC) Limited is 100% owned by Government of India, though IRCTC is not considered as a Government but it is a Government Company. Foreign Company: It is a company in India or body corporate outside India, having a business activity in India or place of business in India, physically or through electronic mode. Hence, it can include online data communication services, whether conducted by e-mail, mobile devices, social media, cloud computing, document management, voice or data transmission, even if such company is not present physically in India.

x. Who are the authorities under the Ministry of Corporate Affairs?

1. DGCoA: Director General of Corporate Affairs (DGCoA) is the topmost bureaucrat from the Indian Company Law Service (through UPSC Civil Services exam), who is equivalent to the post of Secretary to the Union of India and they function through the following offices of the Central Government / MCA:

   a. Regional Directors (RD) - through 7 offices

   b. Registrar of Companies (ROC) and Official Liquidators (OL) - through 25 offices

   c. Central Registration Centre (CRC) - for formation of companies & LLP

   d. Centre for Processing Accelerated Corporate Exit (C-PACE) - for striking off

2. Autonomous bodies: the educational foundations a. IICA - Indian Institute of Corporate Affairs b. NFCG - National Foundation for Corporate Governance c. NFCSR - National Foundation for Corporate Social Responsibility

3. Professional bodies: the compliance agents

a. ICSI - Institute of Company Secretaries of India

b. ICAI - Institute of Chartered Accountants of India

c. ICMAI (ICoAI) - Institute of Cost (& Management) Accountants of India

4. Statutory bodies: the Authorities

a. Insolvency and Bankruptcy Board of India (IBBI) - for overseeing insolvency proceedings.

b. National Company Law Tribunal (NCLT) - quasi-judicial body, which functions as a special court for company law matters. NCLT has one Principal Bench at New Delhi and various Regional Benches.

c. National Company Law Appellate Tribunal (NCLAT) - quasi-judicial body for ¹⁹appeals against NCLT orders, which functions like a High Court for company law matters. NCLAT has one Principal Bench at New Delhi and a Chennai Bench. NCLAT orders are appealable before the highest court of the land, the Supreme Court.

d. Investor Education & Protection Fund Authority (IEPFA) - a regulator protecting unclaimed dividends and unclaimed shares of public in the companies. e. National Financial Reporting Authority (NFRA) - a regulator overseeing the auditing functions and Indian Accounting Standards.

f. Competition Commission of India (CCI) - a regulator that would inspire businesses to be fair, competitive and innovative through the Competition Act, 2002 and the Digital Competition Bill.

5. Attached body - Serious Fraud Investigation Office (SFIO): SFIO has exclusive statutory jurisdiction for investigating and prosecuting CORPORATE FRAUDS or WHITE COLLAR CRIMES. SFIO has powers to arrest a person, guilty of offence.