Key Features of Company Amendment Act 2015
The Company Amendment Act 2015 Features
1) The figure of minimum paid-up capital deleted. 2) The requirement of common seal is made optional. 3) Sec 11 of the Companies Act 2013 is omitted. 4) Stringent penalty for company inviting or accepting deposits. 5) Dividends cannot be declared by a company running at losses.
Company Definition: The word company is used to denote an association of persons who have associated together to conduct or carry on a business for gain. The persons associating together will contribute some money for the conduct of the business, and the total amount is known as the share capital of the company. This share capital will be used by the company to carry out its business. A company is a corporation aggregate. It will be known by a separate name. The liability of the company will be its own. The members’ liability will be only to the extent of the value of the shares they hold in the company. The company may have a common seal. It is the signature of the company. Before the amendment, the requirement of a common seal was mandatory. Now it is optional.
Essential Characteristics of a Registered Company (Advantages of Incorporation)
1) Separate legal entity: When a company is incorporated under the Companies Act, a new legal person will be born, and thereafter, the company will be regarded as an entity separate from its members. This separate legal personality confers upon the company some rights and liabilities apart from those of its members.
2) Perpetual succession: A company is a legal person with perpetual succession. Perpetual succession means that the membership of the company may change from time to time, but that will not affect the continuity of the company.
3) Limited liability: The liability may be limited by shares or by guarantee. If a company is registered with limited liability, the liability of the members will be only to the extent of the face value of the shares they hold or the amount guaranteed by them.
4) Separate property: It can acquire, own, enjoy, or dispose of properties in its own name.
5) Transferability of shares: The shares of a public company are freely transferable.
6) Common seal: The name of the company had to be engraved.
7) Capacity to sue: A company can sue and be sued in its own name.
8) Winding up: The company will cease to be in existence only by its compliance.
Doctrine of Lifting the Corporate Veil or Disadvantages of Incorporation:
A company is a separate legal person apart from its members. The separate legal entity of the company is well established in the decision of the case Salomon vs. Salomon and Company Ltd. This principle may be called the ‘veil of incorporation.’ The effect of this principle is that there will be a fictional veil between the company and its members. After incorporation, the company can acquire properties in its own name, it can sue and be sued in its own name.
The separate legal entity of the company has its own advantages.
Life Insurance Corporation of India vs. Escorts Ltd (1986).
The circumstances under which the corporate veil may be lifted are as follows:
1) Protection of Revenue: If the corporate is used for tax evasion, the courts may ignore the corporate entity of the company.
The Supreme Court in Juggilal vs. Commission of Income Tax 1969 held that the corporate entity of the company will be disregarded when the name of the company is used to circumvent tax obligations.
2) Prevention of Fraud or Improper Conduct: The legal personality of a company may be disregarded by the court in the interest of justice. If the machinery of incorporation is used for some fraudulent purpose like defrauding creditors or avoiding specific performance of a contract or defeating the law, the court may disregard the legal personality of the company.
Jones vs. Lipman 1962
3) Company is a Sham: The court will lift the corporate veil of the company if it is a mere cloak or sham. If the name of an incorporated company is used to avoid contractual obligations or to defraud the members or creditors of the company, the court may disregard the legal personality of the company.
Gilford Motor Company vs. Horne 1933
4) Determination of the Character of the Company: In order to determine the character of the company, i.e., whether it is enemy or not, the court may lift the corporate veil.
Daimler Company Ltd vs. Continental Tyre and Rubber Co 1916
Public Company, Private Company, and One Person Company or Formation of a Company:
Sec 3 of the Companies Act 2013 deals with the formation of the company.
By Sec 3(1), a company may be formed for any lawful purpose by,
a) seven or more persons, where the company to be formed is to be a public company
b) 2 or more persons, where the company to be formed is to be a private company
c) 1 person, where the company to be formed is the ‘one person company,’ that is to say, a private company.
Based on the liability of members, the companies formed may be classified into 3:
A company limited by shares
A company limited by guarantees
An unlimited company.
Public Company: Sec 2(71) defines a public company
Means a company in which a) is not a private company b) has a minimum paid-up capital as may be prescribed.
Thus now a public company needs to have a minimum paid-up share capital as may be prescribed by the central govt. The central govt has not yet prescribed the amount of minimum paid-up share capital that a public company ought to have.
Conditions: a) should not have a private company
b) along with the name of the company, as shown in the memorandum, the word ‘limited’ should be used as the last word.
c) a minimum of 7 persons should have subscribed to the memorandum of the company
It should have a minimum paid-up share capital as may be prescribed by the central govt.
Private Company: Sec 2 (68) defines it
Conditions: a) a minimum of 2 persons should have subscribed to its memorandum
b) along with the name of the company as shown in the memorandum, the words ‘private ltd’ should be used as the last words.
c) it should have a minimum paid-up capital as may be prescribed.
Thus now a private company needs to have a minimum paid-up share capital as may be prescribed by the central govt.
Minimum number of members required to form a private company is 2, and the maximum is 200.
One Person Company: Sec 2(62) of the Companies Act defines it. A one-person company is treated as a private company for all purposes. Thus, the provisions applicable to a private company are applicable to a one-person company. It can be formed for any lawful purpose. The memorandum
Of the company should be subscribed by the person who intends to form a one-person company.
In order to register a one-person company, as in the case of a private company, it should have a paid-up share capital as may be prescribed by the central govt. The articles of the one-person company should- a) prohibit any invitation to the public to subscribe to any securities of the company.
b) restrict the right to transfer its shares.
Rules: a) only a natural person who is an Indian citizen and resident in India shall be eligible to incorporate a one-person company.
b) only a natural person who is an Indian citizen and resident in India shall be a nominee for the sole member of a one-person company.
Conversion of Companies
Sec 18 of the Companies Act 2013 permits conversion of a company from one class to another. Thus, a private company can be converted into a public company. So, a public company can be converted into a private company.
One Person Company into a Public Company or a Private Company Voluntarily: A one-person company can convert itself into a public company or a private company. The conversion is to be effected by the alteration of the memorandum and articles of the company. Sec 13 provides for the alteration of the memorandum and articles of the company. In order to convert it into a private company, the numbers of members and directors are to be increased to two. It can be converted into a public company by increasing the minimum numbers of members to seven and the numbers of directors to a minimum of three. It cannot convert voluntarily into any kind of company unless two years have expired from the date of incorporation of the one-person company. It has to make an application to the registrar for effecting conversion.
Conversion of One Person Company by Operation of Law: By Rule six of the rules, if the paid-up share capital of a one-person company exceeds 50 lakh rupees or its average annual turnover during the relevant periods exceeds 2 crore rupees, it shall cease to be entitled to company as a one-person company. The one-person company shall, within a period of sixty days from the date on which it ceased to be a one-person company. The conversion or the new registration of a company shall not affect any debts, liabilities, obligations, or contracts incurred or entered into by or on behalf of the company before conversion, and such debts, liabilities may be enforced in the matter as such registration had not been done.