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Company and Business Law in India

Under the terms of the Companies Act (1956), which is the company law in India, a company means a company registered under the present Act of the preceding Acts. Thus, a company comes into existence only by registration under the Company Law Act.
Written by:
Prachi Darji
Published on
28-Sep-19

One of the biggest thing in business is to open yourself up for change. We don’t have to change who we are, we have to change the way we go about it. - Jay Z

During the last two decades, changes have taken place in the Indian economy, in the communication and transportation infrastructure as well as in the method of commerce, banking, and international trade.

Liberalisation of the economy is the process of changing the terms of trade between urban and rural, labour and industry, finance and commerce.

Keeping all this modernisation in view, the government constituted a committee to enhance and create more opportunities by amending the existing rules and regulations related to Company Law or Business Law in India.

In terms of the Companies Act, 1956 which is the company law in India, a company means a company registered under the present Act of the preceding Acts. Thus, a company comes into existence only by registration under the Company Law Act or under the company law in India.

In India, corporate affairs are regulated through various Company Law Acts or business laws in India which are enforced as company laws in India and regulations enforced by the Government of India and administered by the Ministry of Corporate Affairs (MCA).

Enlisted below are few regulations that are available in India to regulate fair and good competition in the market which together can be known as company laws in India or company law act. 

  • Companies Act, 2013

  • Societies Registration Act, 1860

  • The Indian Partnership Act, 1932

  • The Companies Amendment Act, 2006

  • The Limited Liability Partnership Act, 2008

In India, companies are hence incorporated under the Indian Companies Act, 2013 which is the company law or business law in India. A partnership arising from a contract is governed by the general law of contract (also called as company law in India or business law in India) in matters where the Partnership Act does not specifically make any provision (i.e rules relating to offer & acceptance, consideration, the legality of an object, etc.)

 

Corporate personality, the nature, and advantages of a company can best be understood by looking at the following characteristic features of the company law or business law in India:

  • Independent corporate existence

By registration under the Company Law Act or company law, or business law in India; a company becomes vested with corporate personality, which is independent of and distinct from its members. A company is a legal person under the company law or business law in India.

In this aspect of company laws in India, the decision of House of Lords in Salomon vs Salomon & Co. Ltd (1897 AC 22) is a well-known case in this aspect that though incorporated under the Company Law Act, the company never had an independent existence. 

Business law in India provides that when a memorandum is duly signed and registered, the subscribers are a body corporate capable forthwith of existing with all the functions of an incorporated individual as provided in the company law.

It is difficult to understand, how a body corporate thus created by statute can lose its individuality by issuing the bulk of its capital to one person. The company under the company law is a different person altogether from the subscribers of the memorandum. 

  • Limited liability

    Limitation of liability is another major advantage of incorporation under the company law or business law in India. The company, being a separate entity, leading its own business life, the members are not liable for its debts under the company law or company law act. If the liability of the members is limited by shares, each member is bound to pay the nominal value of the share held by him and his liability ends there under the company law in India. One of the primary and accepted motivations behind incorporating a company under the company law in India is to limit personal risks by obtaining the benefit of limited liability.

  • Perpetual succession

    In the corporate world and as per the company law in India, it is said that 'An incorporated company never dies, members may come and go, but a company can go on forever'. The death or insolvency of members does not affect the continued existence of the company. The company remains the same entity in the like manner as the river is still the same river, though the parts which compose it are changing every instant.

  • Transferable shares

   When joint-stock companies are established under the company laws in India, the great object was that the shares should be capable of being easily transferred. Section 82 of the Company Law Act, 1956 gives expression to this principle by providing that 'the shares or other interests of any member shall be movable property'. The unique advantage of this under the business law in India is that a member may sell his shares in the open market and get back his money, without affecting the capital structure of the company. Section 111 A, introduced in the Companies Act 1956 by the Depositories Act, 1996 specially declares that the shares of a public company shall be freely transferable. 

  • Separate property

   The property of an incorporated company is vested in the corporate body under the business law in India. The company is capable of holding and enjoying the property in its own name. No members can claim ownership of any item of the companies assets. Thus, when a substantial shareholder insures the companies assets in his own name will not be able to recover indemnity when the said asset burns in a fire as he had no insurable interest in the companies property.

  • Capacity for suits

   A company can sue and be sued in its corporate name as provided in the business law in India. The name of its managerial personnel or members need not be impleaded. The action against a group of persons is thus reduced to a unitary action.

  • Professional management

   Business law in India provides that a company is capable of attracting professional managers. It is due to the fact that being attached to the management of a company gives members the status of an executive.

  • Access to money market

   Companies are one of the few legal institutions which are allowed access to the money market for the formation of its shares and loan capital as per the provisions of business laws in India. A company can collect interest-free equity and preference share capital on which dividend needs to be paid as and when there are profits. This can be done with the help of a prospectus through public issue or private placement. 

As good as these aspects sound, the Company Act also has several drawbacks like:

  • Lifting the corporate veil - All the above-noted advantages of incorporation follow the principle that for all purposes of law a company should be regarded as a separate entity from its shareholders.

  • Formality and expense - Formation of a company in India is an expensive affair. The formalities need to comply with the rules and regulations of the state where it is to be incorporated. 

  • Company, not a citizen - A company though regarded as a legal person should not be confused as a citizen. Remember the holy river Ganga is also regarded as a legal person and not a citizen.

Registration and Incorporation

Registration of a company is obtained by filing an application with the Registration of Memorandum and articles under Section 33 of the act. The application has to be accompanied by a number of documents like Memorandum of Association (MOA), Article of Association (AOA), a copy of the agreement, and a declaration that all the requirements of the act have complied with the contract made on behalf of a company even before it is duly incorporated. 

Types of Companies under Companies Act, 2013

The Company Act defines different kinds of companies that can be incorporated under this Act. They are:

  • Unlimited company -  A company may be incorporated with unlimited liability of its shareholders who are all equally liable for the debts of the company in the event of insolvency

  • Guarantee company - The liability of the members of a company may be limited either by shares or by guarantee. In other words, the members shall contribute a fixed sum of money towards the assets of the company

  • Private company - A private company as defined by the Act, means a company whose Article of Association fulfils mandates like having a minimum capital of one lakh rupees or more, have certain rights over its members, and have a minimum of fifty members and prohibits any invitation to the public to subscribe to its shares or debentures.

  • Foreign company - A company which has incorporated outside India

  • Government company - A company having 51% or more shares held by the government

Apart from incorporating a company, there is ‘restructuring’ (when a company, business, or undertaking is transferred to another company formed for that purpose) and ‘amalgamation’ (when two or more companies are joined to form a third entity or is absorbed or blended into another) of a company as well. 

A reconstruction or amalgamation may take place (i) by the sale of shares; (ii) by sale of the undertaking; (iii) by a scheme of arrangement. (Bombay Gas P Ltd. vs Government of India (1997 89 Comp case 195 Bom).

ONGC-IMPERIAL ENERGY: Oil and Natural Gas Corporation Limited (ONGC), is the national oil company of India. Imperial Energy Group is part of the Indian National Gas Company, ONGC Videsh Ltd (OVL). Imperial Energy includes 5 independent enterprises operating in the territory of the Tomsk region, including 2 oil and gas producing enterprises. Oil and Natural Gas Corp. Ltd (ONGC) took control of the Imperial Energy UK based firm operating in Russia for the price of $1.9 billion in early 2009. This acquisition was the second largest investment made by ONGC in Russia.

None of such schemes can be sanctioned unless the courts have received a report from the Company Law Board or Registrar that the affairs of the company have not been conducted in a manner prejudicial to the members or the company's affairs.

Winding UP

Winding up is a process by which the life of a company is ending and its property is administered for the benefit of its members and creditors. Winding up of a company is different from the insolvency of an individual because a company can be wound up. The Act provides for three types of winding up:

  • Winding up by court

  • Voluntary winding up 

  • Members winding up

  • Creditors voluntary winding up

  • Voluntary winding up under supervision

A petition in regard to winding up can be filed by;

  • Petition by the company - When it has passed a special resolution, requesting that it be wound up by the court.

  • Creditors petition - Where the petition is brought by a contingent or prospective creditor.

  • Contributory petition - Where the ground is a reduction in membership, any contributor can apply.

  • Registrar’s petition - Based on the grounds enlisted under Section 433, a registrar can file a petition.

  • Central government's petition - The government can apply when an investigation shows that the conditions specified in Section 235 or 237 are satisfied.

As soon as a winding-up order is passed, the official liquidator attached to the High court or District court becomes the liquidator of the company under Section 448(1) of the Act. He proceeds with the winding-up process and performs duties as imposed by the court. The acts of the liquidator are valid notwithstanding any defect in his qualifications or appointment under Section 451(3) of the Act.

When the affairs of the company have been completely wound up or when, for want of funds, the liquidator cannot proceed with the winding up or if it is just and reasonable to do so, the court makes an order that the company be dissolved from the date of the order. Within thirty days, the liquidator files a copy of the order with the registrar.

Also, with the last amendment in the Company Act, 2013, a provision for Corporate Social responsibility was added under Section 135, which requires companies to spend 2% of their net profit on social projects. Socially responsible projects are designed with a view of community development.

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External Links:

[1] Companies Act, 1956 - An Act to consolidate and amend the law relating to companies and certain other associations.

[2] Depositories Act, 1996 - An Act to provide for regulation of depositories in securities and for matters connected therewith or incidental thereto.