Companies act ,2013

Companies Act, 2013

Meaning and Nature of a Company with Emphasis on its Advantages

1. Meaning of 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. It is governed by the provisions of the Companies Act, 2013 in India.

According to Section 2(20) of the Companies Act, 2013, "Company means a company incorporated under this Act or under any previous company law."

Lord Justice Lindley: "A company is an association of many persons who contribute money or money's worth to a common stock and employ it for a common purpose. The common stock so contributed is denoted in money and is the capital of the company."

• A company is an artificial person created by law. It has a separate legal identity distinct from its members. It can enter into contracts, own property, sue, and be sued in its own name.

2. Nature of a Company:

The nature of a company can be understood through its key characteristics:

•  Separate Legal Entity: A company has a legal personality distinct from its shareholders and directors.

Example: In the landmark case of Salomon v. Salomon & Co. Ltd. (1897), it was established that a company has a separate legal existence.

• Perpetual Succession: A company enjoys uninterrupted existence, regardless of changes in ownership, death, or insolvency of its shareholders or directors.

Example: Even if all members of a company die, the company will continue to exist.

• Limited Liability: The liability of shareholders is limited to the extent of their share capital or guarantee.

Example: If a shareholder owns shares worth ₹1,000, their liability cannot exceed ₹1,000 even if the company incurs heavy losses.

• Artificial Legal Person: A company is considered an artificial person created by law. It can own property, sue, and be sued.

Example: A company can sign contracts in its own name.

• Transferability of Shares: In a public company, shares can be freely transferred. This feature provides liquidity to shareholders.

• Common Seal (Optional under Companies Act, 2013): Earlier, a common seal acted as the official signature of the company. However, under the Companies (Amendment) Act, 2015, it is now optional.

• Capacity to Sue and Be Sued: A company can sue others and can also be sued in its own name.

• Separate Property: A company can own, acquire, and dispose of property in its own name. Shareholders cannot claim ownership of the company’s assets.

• Corporate Veil: The concept of the 'corporate veil' ensures the company is distinct from its owners. However, courts may lift the corporate veil in cases of fraud or misconduct.

3. Advantages of a Company:

• Limited Liability: Shareholders' liability is limited to their capital contribution. Personal assets remain protected in case of company debts.

• Perpetual Succession: The company continues its existence irrespective of changes in membership. This ensures stability and continuity of operations.

• Transferability of Shares: In public companies, shares are freely transferable, providing liquidity and investment flexibility.

• Ability to Raise Capital: Companies can raise large amounts of capital by issuing shares, debentures, or taking loans from financial institutions. Public companies can also raise funds from the public via IPOs.

• Separate Legal Entity: The company has its own identity, separate from its shareholders. It can own property, enter contracts, and sue in its name.

• Professional Management: Companies can hire professional and experienced managers to run the business efficiently.

• Expansion Potential: A company can easily expand its operations by raising funds from the public or other sources.

• Tax Benefits: Companies enjoy specific tax benefits and incentives under Indian tax laws.

• Easy Transfer of Ownership: Ownership can be transferred without disrupting the company’s operations, especially in public companies.

A company is a powerful legal structure offering several advantages, such as limited liability, perpetual succession, and easy capital raising. Its unique features, like separate legal identity and professional management, make it a preferred choice for large-scale business ventures. However, it also comes with regulatory compliance and governance responsibilities under the Companies Act, 2013.

Membership of a Company: Acquisition and Termination

Membership of a company is a fundamental aspect of corporate law and is governed by specific provisions under the Companies Act, 2013. Let’s break this into detailed sections:

Membership of a Company

1. Definition

As per Section 2(55) of the Companies Act, 2013: A member is ,A person who has subscribed to the Memorandum of the company. A person who agrees in writing to become a member and whose name is entered in the register of members. A beneficial owner whose name is recorded as such in the records of a depository under the Depositories Act, 1996.

2. Categories of Members

1. Subscribers to the Memorandum:

Those who sign the Memorandum at the time of incorporation automatically become members.

2. Allottees of Shares:

Individuals or entities who are allotted shares and their names are entered in the Register of Members.

3. Beneficial Owners:

Individuals whose names are recorded as owners in the depository records.

Acquisition of Membership

1. By Subscription to Memorandum (Section 3)

Every subscriber to the Memorandum becomes a member from the date of incorporation.

2. By Allotment of Shares (Section 39 & 42)

A person acquires membership by applying for and being allotted shares:

Section 39: Deals with the allotment of shares on the issuance of a prospectus.

Section 42: Covers private placement of shares.

3. By Transfer of Shares (Section 56)

Membership can be acquired by transferring shares from an existing member.

The company must register the transfer in the Register of Members.

4. By Transmission of Shares (Section 56)

Membership passes by operation of law, such as inheritance upon the death of a member or through a court decree.

5. By Agreement:

A person who agrees to become a member and whose name is entered in the Register of Members (e.g., as a joint holder).

6. By Acquiring Beneficial Ownership:

A person whose name is entered as a beneficial owner in the depository records becomes a member.

7. By Holding Debentures (Limited Cases - Section 71):

Debenture-holders or other security holders may acquire membership rights if specifically mentioned in the terms of issuance.

Rights of Members

1. Right to vote in general meetings.

2. Right to receive dividends and distributions.

3. Right to inspect the company's documents such as MoA, AoA, and financial statements.

4. Right to file a class-action suit under Section 245.

Termination of Membership

Membership can terminate in the following ways:

1. By Transfer of Shares (Section 56)

When a member transfers shares to another person, and the company registers the transfer, the membership of the transferor ends.

2. By Forfeiture of Shares (Section 10(4)):

A company may forfeit shares if a member fails to pay the required calls on shares.

3. By Surrender of Shares (Not specifically mentioned in the Act):

Members may voluntarily surrender shares, subject to the company's approval and terms.

4. By Redemption of Preference Shares (Section 55):

In the case of redeemable preference shares, membership terminates upon redemption.

5. By Transmission of Shares (Section 56):

Membership terminates upon the death of a member, and shares are transmitted to the legal heirs.

6. By Expulsion (Section 58):

The AoA may authorize expulsion for reasons like breach of terms or misconduct, subject to the principles of natural justice.

7. By Winding-Up of the Company (Section 270-365):

Membership ceases upon the liquidation of the company.

8. By Insolvency or Mental Incapacity:

Membership may terminate if the member is declared insolvent or mentally incapacitated by a court.

9. By Repurchase or Buyback of Shares (Section 68):

When a company buys back its shares, the members whose shares are bought back cease to be members.

10. By Court Order (Section 59):

The National Company Law Tribunal (NCLT) may pass an order removing a member’s name from the Register of Members in cases of wrongful entry.

Register of Members

1. Maintenance of Register (Section 88):

Companies are required to maintain a Register of Members, recording:

Names, addresses, and details of members.

Shares held and their distinctive numbers.

2. Inspection and Rectification (Section 94 & 59):

Members have the right to inspect the register.

Errors or wrongful entries in the register can be rectified by the company or through NCLT intervention.

Relevant Case Laws

1. Borland's Trustee v. Steel Bros & Co. Ltd. (1901):

Membership rights are subject to the terms of the company’s constitution (MoA and AoA).

2. V.B. Rangaraj v. V.B. Gopalakrishnan (1992):

Any restriction on share transfer must be in the Articles of Association.

3. Nutan Dhanvarsha Co-op. Housing Society Ltd. v. K.K. Thakkar (1992):

Held that members have no right to withdraw voluntarily unless allowed by the company's rules.