Kinds of Company | Company Law - CLAT PG PDF Download

Types of Companies under the Companies Act, 2013

The Companies Act, 2013 outlines the different types of companies that can be promoted and registered under the Act. The three basic types of companies that may be registered are:

• Private Companies
• Public Companies
• One Person Company(to be formed as Private Limited)

Formation of Companies

• Public Company: Requires seven or more persons to form.
• Private Company: Requires two or more persons to form.
• One Person Company: Requires one person to form, who must subscribe their name to the memorandum.

A company formed under the Act may be:

• Limited by Shares
• Limited by Guarantee
• Unlimited

Ways of Incorporation

Statutory Companies

• Constituted by a special Act of Parliament or State Legislature.
• Exempt from the provisions of the Companies Act, 2013.
• Examples include the Reserve Bank of India and Life Insurance Corporation of India.

Registered Companies

• Incorporated under the Companies Act, 2013 or previous company law.
• Registered with the Registrar of Companies (ROC).

Types of Companies Based on Liability

Companies can be classified based on the liability of their members into three main types:

Unlimited Liability Companies

• In this type of company, the members are responsible for the company's debts without any limit. Their liability is proportionate to their respective interests in the company.
• Unlimited liability companies can have share capital or not, and they can be either public or private.

Companies Limited by Guarantee

• A company limited by guarantee has its members' liability restricted to a specific amount that they agree to contribute to the company's assets in case of winding up.
• Members of such a company act as guarantors for the company's debts up to the agreed amount.

Companies Limited by Shares

• In a company limited by shares, the liability of its members is limited to the unpaid amount on their shares as specified in the memorandum.
• For instance, if a shareholder has paid ₹75 on a share with a face value of ₹100, they can be asked to pay the remaining ₹25 only.
• Companies limited by shares are the most common type and can be either public or private.

Other Types of Company

• Associations not for profit: These are organizations that operate for purposes other than making a profit and are licensed under Section 8 of the Companies Act, 2013 or previous company laws.
• Private Company: A company with restrictions on share transfer and a limit on the number of members (up to 200), excluding certain individuals.
• Public Companies: Companies that can offer shares to the public and do not have the same restrictions as private companies.
• One Person Company: A type of private company with a single member.
• Government Companies: Companies owned or controlled by the government.
• Foreign Companies: Companies incorporated outside India but operating within the country.
• Holding and Subsidiary Companies: Companies in a parent-subsidiary relationship.
• Associate Companies/Joint Venture Companies: Companies with significant influence or joint control by another company.
• Investment Companies: Companies primarily engaged in investment activities.
• Producer Companies: Companies formed by farmers or producers to engage in production and marketing activities.
• Dormant Companies: Inactive companies that have not conducted any business activities for a specified period.

Private Company

• A private company, as defined in Section 2(68) of the Companies Act, 2013, is a company with a minimum paid-up share capital of one lakh rupees (or a higher amount as prescribed) and certain restrictions in its articles of association.
• Key features of a private company include:
• Share Transfer Restrictions: The company restricts the right to transfer its shares.
• Membership Limit: Except for One Person Companies, the number of members is limited to two hundred. Joint holders of shares are considered a single member, and certain individuals (such as employees) are excluded from the member count.
• Public Invitation Prohibition: The company prohibits any invitation to the public to subscribe for its securities.
• Debenture Issuance: A private company can issue debentures to any number of persons, but public invitations for debenture subscriptions are prohibited.
• The restrictions and limitations must be explicitly stated in the company's articles of association. If a private company alters its articles to remove these restrictions, it will cease to be a private company.
• A private company can accept deposits only from its members, following the provisions of Section 73 of the Companies Act, 2013.
• The name of a private limited company must end with "Private Limited."
• A private company can be formed for any lawful purpose by two or more persons subscribing to the memorandum and complying with registration requirements.
• A private company must have a minimum of two directors, who can also be the only two members of the company.

One Person Company (OPC)

With the implementation of the Companies Act, 2013, a single person could constitute a Company, under the One Person Company (OPC) concept.

The Companies Act, 2013 has done away with redundant provisions of the previous Companies Act, 1956, and provides for a new entity in the form of one person company (OPC), while empowering the Central Government to provide a simpler compliance regime for small companies.

The concept o f One-person com pany is quite revolutionary. I t gives the individual entrepreneurs all the benefits o f a company, which means they w ill g e t credit, b ank loans, access to the market, limited liability, and legal protection available to companies.

Key Features of One Person Company (OPC)

• Single Ownership: OPC allows a single individual to own and operate a company, providing all the benefits of corporate status without the need for multiple shareholders.
• Limited Liability: The owner’s liability is limited to the amount invested in the company, protecting personal assets from business liabilities.
• Simplified Compliance: OPCs face fewer compliance requirements compared to traditional companies, making it easier for small entrepreneurs to manage their businesses.
• Access to Credit: OPCs can avail of bank loans and credit facilities just like other companies, enhancing their financial capabilities.
• Market Access: OPCs have direct access to markets and wholesale retailers, eliminating the need for middlemen and increasing profit margins.
• Legal Protection: OPCs enjoy legal protections similar to those of larger companies, providing a safety net for entrepreneurs.
• Encouragement of Small Businesses: By reducing the barriers to entry and operational complexities, OPCs encourage small businesses and individual entrepreneurs to formalize their ventures.

Small Company

Introduction

The concept of small companies was introduced in the Companies Act, 2013 based on the recommendations of the Dr. JJ Irani Committee. The committee argued that small companies should not be subjected to the same regulatory burdens as larger corporations. Instead, small companies should benefit from simplified decision-making processes, reduced financial reporting and audit requirements, and easier capital maintenance rules.

Definition of Small Company

A small company, as defined in Section 2(85) of the Companies Act, 2013, is a type of private company characterized by its size, specifically in terms of paid-up capital and turnover. The criteria for classifying a private company as a small company are as follows:

• Paid-up Share Capital: The paid-up share capital of the company must not exceed fifty lakh rupees (₹50,00,000) or such higher amount as may be prescribed, which shall not exceed five crore rupees (₹5,00,00,000).
• Turnover: The turnover of the company, as per its last profit and loss account, must not exceed two crore rupees (₹2,00,00,000) or such higher amount as may be prescribed, which shall not exceed twenty crore rupees (₹20,00,00,000).

Exclusions

• The definition of a small company does not apply to:
• A holding company or a subsidiary company.
• A company registered under Section 8 of the Companies Act.
• A company or body corporate governed by any special Act.

Key Features of Small Companies

• Simplified Compliance: Small companies benefit from reduced compliance requirements, making it easier for them to operate without the heavy regulatory burden faced by larger companies.
• Cost-Effective: The framework for small companies aims to achieve transparency at a lower cost, enabling these businesses to meet regulatory standards without excessive expenses.
• Flexibility: The provisions for small companies offer flexibility in terms of financial reporting, auditing, and capital maintenance, allowing them to focus on growth and operational efficiency.

Public Company

Meaning of Public Company

• A public company is defined under Section 2(71) as a company that is not a private company and has a minimum paid-up share capital of five lakh rupees or a higher amount as prescribed.
• If a company is a subsidiary of a non-private company, it is considered a public company for legal purposes, even if it remains a private company in its articles.

Formation of Public Company

• According to Section 3(1)(a), a public company can be formed for any lawful purpose by seven or more persons who subscribe their names to a memorandum and comply with registration requirements.

Characteristics of Public Company

• A public company is an association of not less than seven members registered under the Companies Act.
• Anyone from the public willing to pay the price can acquire shares or debentures in the company.
• Securities of a public company may be quoted on a Stock Exchange.
• The number of members is not limited to two hundred, and the articles of a public company do not contain the restrictions mentioned in Section 2(68).

Transferability of Securities

• As per Section 58(2), the securities or interests of any member in a public company are freely transferable.
• However, any contract or arrangement regarding the transfer of securities between parties is enforceable as a contract.

Distinction Between Public and Private Companies

• The concept of free transferability of shares in public and private companies is highlighted in the case of Western Maharashtra Development Corpn. Ltd. V. Bajaj Auto Ltd[2010] 154 Com Cases 593 (Bom).
• The Companies Act distinguishes between public and private companies concerning the transferability of shares.
• A public company allows shares or debentures to be freely transferable, while a private company restricts the right to transfer its shares.

Principle of Free Transferability

• The provision for free transferability of shares in a public company is based on the principle that members of the public should have the freedom to purchase and every shareholder the freedom to transfer.

Obligations and Rights in Public Companies

• The incorporation of a company in the public sector, as opposed to the private sector, entails specific consequences and obligations under the law.
• Those who promote and manage public companies assume these obligations.
• Corresponding to these obligations are rights recognized by law as inherent in the members of the public who subscribe to shares.

Limited Company

As per section 3(2), a company formed under this Act may be either (a) a company limited by shares; or (b) a company limited by guarantee or (c) an unlimited company.

The term ‘Limited Company’ means a company limited by shares or by guarantee.

The liability of the members, in the case of a limited company, may be limited with reference to the nominal value of the shares, respectively held by them or to the amount which they have respectively guaranteed to contribute in the event of winding up of the company.

Types of Limited Companies

a. Companies Limited by Shares

• A company limited by shares has members whose liability is limited to the amount unpaid on their shares.
• No member can be asked to pay more than the nominal value of their shares.
• For fully paid shares, no further payment is required.
• For partly paid shares, the unpaid amount can be called at any time during the company's existence.
• This is the most common type of company.

b. Companies Limited by Guarantee

• A company limited by guarantee has members whose liability is limited to the amount they agree to contribute to the company's assets in case of winding up.
• Examples include clubs, trade associations, and societies.
• Members' liability arises only when the company is in liquidation, not while it is operational.
• A guarantee company may or may not have share capital.
• A guarantee company without share capital obtains funds from sources like fees or grants.
• A guarantee company with share capital raises initial capital from members and obtains working funds from other sources.
• The Memorandum of Association must specify the amount each member undertakes to contribute in case of winding up.
• The amount of guarantee in the Memorandum can vary among members.

Unlimited Company

• An unlimited company has no limit on the liability of its members.
• Members may be required to contribute up to the full extent of their assets to meet the company's obligations in case of winding up.
• Members are not directly liable to the company's creditors, unlike partners in a firm.
• Their liability is only towards the company, and only the liquidator can ask members to contribute to the company's assets in case of winding up.
• An unlimited company may or may not have share capital.
• Under Section 18, an unlimited company can re-register as a limited company by altering its memorandum and articles, but this does not affect debts, liabilities, or contracts incurred before the change.

Government Companies

According to Section 2(45) of the Companies Act, a "Government Company" is defined as any company where not less than 51% of the paid-up share capital is held by the Central Government, State Government(s), or a combination of both. This definition also includes subsidiary companies owned by such government entities.

Despite the government's significant control over these companies, a Government Company is not considered a government department or establishment. This distinction was highlighted in the case of Hindustan Steel Works Construction Co. Ltd. v. State of Kerala (1998).

Employees of Government Companies are not classified as government servants. Therefore, they do not have the legal right to demand that the government pay their salaries or cover additional expenses related to pay scale revisions. It is the responsibility of the company to ensure salary payments, as established in the case of A.K. Bindal v. Union of India (2003).

When the government engages in trading activities through Government Companies, it operates as a company rather than as a state entity. A Government Company functions independently and is not merely an extension of the government.

Foreign Companies

• Definition: A "foreign company" is defined as any company or body corporate incorporated outside India that has a place of business in India, either by itself or through an agent, and conducts business activities in India.
• Registration Requirements: Foreign companies establishing a place of business in India must register with the Registrar of Companies within 30 days. This includes submitting a certified copy of the company's constitution documents, details of directors and secretary, and information about authorized representatives in India.
• Exhibition of Information: Foreign companies must display their name, country of incorporation, and limited liability status as specified in Section 382.
• Accounting and Reporting: Foreign companies are required to maintain books of account and file annual financial statements with the Registrar of Companies, along with details of places of business in India.
• Winding Up: If a foreign company ceases to carry on business in India, it may be wound up as an unregistered company under certain provisions of the Companies Act, even if it has been dissolved under the laws of its country of incorporation.

D. Holding and Subsidiary Company

Companies are classified into holding, subsidiary, and associate companies based on the concept of control.

Holding Company

• According to Section 2 (46) of the Companies Act, a holding company is defined as a company that has one or more subsidiary companies under its control.

Subsidiary Company

• As per Section 2 (87), a subsidiary company is one where the holding company:
• Controls the Board of Directors: The holding company has the power to control the composition of the Board of Directors.
• Exercises Majority Control: The holding company, either on its own or with its subsidiary companies, controls more than half of the total share capital.

Key Points:

• A company is considered a subsidiary of the holding company even if the control is exercised by another subsidiary of the holding company.
• The composition of a company's Board of Directors is controlled by another company if that company has the power to appoint or remove a majority of the directors.
• The term "company" includes any body corporate.
• There are limits on the number of subsidiary layers a holding company can have, although these limits are yet to be notified.

E. Associate Company

• An associate company is defined in Section 2(6) of the Companies Act as a company in which another company has significant influence, but which is not a subsidiary of that company. This includes joint venture companies.
• Significant influence is generally considered to be the ability to control at least 20% of the total share capital or business decisions under an agreement.
• The concept of the associate company was introduced to enhance governance and transparency in corporate relationships, providing a clearer framework for associated companies.
• Contracts with associate companies are treated similarly to contracts with related parties, requiring disclosure, approval, or entry in statutory registers as applicable.

F. Investment Companies

• An investment company, as per explanation (a) to section 186, is defined as a company whose principal business involves the acquisition of shares, debentures, or other securities.
• Investment companies primarily focus on acquiring, holding, and dealing in shares and securities. While the term "investment" suggests income generation through holding shares and securities, such as interest or dividends, these companies also engage in buying and selling securities for profit.
• If a company significantly engages in other business activities, it will not be classified as an investment company.
• Legal opinions on the definition of an investment company vary:
• One perspective sees an investment company as one that acquires and holds shares and securities solely for income generation through holding them.
• Another view considers an investment company as one that acquires shares and securities for income generation through both holding and dealing in them.
• According to Section 2(1 OA) of the Insurance Act, 1938, an investment company is one whose principal business involves the acquisition of shares, stocks, debentures, or other securities.

Producer Company

Section 465(1) of the Companies Act, 2013 states that the Companies Act, 1956 and the Registration of Companies (Sikkim) Act, 1961 are repealed. However, the provisions of Part IX-A of the Companies Act, 1956 still apply to Producer Companies until a special Act is made for them. Therefore, Producer Companies are governed by the Companies Act, 1956.

Producer Companies are governed by the Companies Act, 1956.

The Companies (Amendment) Act, 2002 introduced Part IXA to the Companies Act, 1956, adding 46 new sections from 581A to 581ZT.

Definition of Producer Company (Section 581A(1))

• A producer company is a body corporate with objects or activities specified in Section 58IB and is registered under the Companies Act, 1956.

Membership

• Membership is open to primary producers who are involved in activities such as agricultural production.

Objects of Producer Companies (Section 58IB(1))

The objects of a producer company may include:

• Production, Harvesting, Procurement: Activities related to the production, harvesting, procurement, grading, pooling, handling, marketing, selling, exporting of primary produce, or importing goods or services for the benefit of members.
• Processing: Activities such as preserving, drying, distilling, brewing, venting, canning, and packaging of members’ produce.
• Manufacturing and Sale of Machinery: Manufacturing, selling, or supplying machinery, equipment, or consumables primarily to its members.
• Education: Providing education on mutual assistance principles to members and others.
• Technical and Consultancy Services: Rendering technical services, consultancy, training, research and development, and other activities promoting members' interests.
• Power Generation and Resource Management: Generation, transmission, and distribution of power, revitalization of land and water resources, and communication related to primary produce.
• Insurance: Insuring producers or their primary produce.
• Mutuality Promotion: Promoting techniques of mutuality and mutual assistance.
• Welfare Measures: Implementing welfare measures or facilities for the benefit of members as decided by the Board.
• Ancillary Activities: Any other activity ancillary or incidental to the activities mentioned above, promoting mutuality and mutual assistance among members.
• Financing: Financing procurement, processing, marketing, or other activities, including extending credit facilities or financial services to members.

Every producer company must primarily deal with the production of its active members to carry out its objects.

H. Dormant Companies

Introduction

Dormant companies are a new category recognized under the Companies Act, 2013. These are companies that are formed and registered for future projects or to hold assets/intellectual property but have no significant accounting transactions.

Definition of Inactive Company

• An inactive company is one that has not conducted any business or operations, made any significant accounting transactions, or filed financial statements and annual returns in the last two financial years.

Significant Accounting Transaction

• A significant accounting transaction is any transaction other than the payment of fees to the Registrar, payments to fulfill legal requirements, allotment of shares to meet legal requirements, and payments for office and record maintenance.

Application for Dormant Company Status

• According to section 455(2), the Registrar will consider applications for dormant company status and issue a certificate if approved.

Register of Dormant Companies

• The Registrar is required to maintain a register of dormant companies as per section 455(3).

Action for Non-filing of Financial Statements

• If a company fails to file financial statements or annual returns for two consecutive financial years, the Registrar will issue a notice and enter the company's name in the register of dormant companies.

Requirements for Dormant Status

• A dormant company must have a minimum number of directors, file specific documents, and pay an annual fee to retain its dormant status.

Reactivation as Active Company

• A dormant company can become an active company by submitting an application along with the required documents and fee.