For our studentsCOMPANY LAW

Kinds of Companies

A. Private and Public Companies

A private company means a company having a minimum paid up share capital of Rs. 1 lakh or such high paid up share capital as may be prescribed. However this provision was amended by the Companies (Amendment) Act, 2015, and its is now provided that such companies must have a minimum paid up capital of such amount as may be prescribe. In other words, the monetary limit imposed earlies in the Act has been deleted. A private company has a name which ends in 'Private Limited.'

S. 2(68) of the Act, which defines a private company, prescribes that the following features must be included in the articles of every private company namely:

a. the number of members of a private company cannot, expect in the case of OPC (One Person Company) exceed 200, not counting employees and ex employees of the company(who are also a member). Joint shareholders have to be counted as one member.

b. a private company cannot invite members of the public subscribers for its securities.

c. there must be some restriction on the transfer of shares of the company. In other words, the shares of the private company should not be freely transferable. Needless to say, if the company has no share capital, this requirement is rendered redundant.

The above requirements are cumulative in nature, and even if one of them is missing, the company is deemed to be a public company. A public company as defined under S.2(71) of the Act is a company which is not a private company. When enacted in 2013 the Act provided that a public company must have a minimum paid up capital of Rs. 5 Lakhs or such higher amounts as may be prescribed. However, this provision was amended by the Companies(Amendment) Act, 2015 and it is now provided that such companies must have a minimum paid up capital of such an amount as may be prescribed in the other words, the monetary limit imposed earlier in the Act has been deleted.

Difference Between a Private Company and Public Company

Sr.no	PRIVATE COMPANY	PUBLIC COMPANY
1	It can be incorporated and thereafter continue, with only two members. An OPC (One Person Company) which is regarded as a private company has only one member.	It required atleast 7 members for its incorporation.
2	There is a restriction on the maximum number of members of a private company i.e 200 members.	A public company has no upper limit on the number of its members.
3	As per the Companies (Amendment) Act, 2015, companies must have a minimum paid up capital of such amount as may be prescribed.	As per the Companies (Amendment) Act, 2015, companies must have a minimum paid up capital of such amount as may be prescribed.
4	A private company must have atleast 2 directors. An OPC can have only one.	A public company must have atleast 3 directors.
5	Since private company cannot issue prospectus, the stringent provisions of the Act relating to the issue of a prospectus do not apply to it.	The stringent provisions of the Act relating to the issue of a prospectus shall apply to a public company.
6	The restrictions contained in the Act as regards the appointment and remuneration of managerial personnel do not apply to private companies.	The restrictions contained in the Act as regards the appointment and remuneration of managerial personnel apply to public companies.
7	The articles of a private company can provide additional disqualifications for appointment of directors.	A public company cannot provide additional disqualifications for appointment of directors.
8	Under the 2013 Act, a person cannot be a director in more than 20 companies.	He cannot be a director in more than 10 public companies.
9	In a private company, if 2 members are personally present at a shareholders meeting, there is a sufficient quorum.	Quorum of 5 members, if the company has upto 1000 members, 15 if the company has more than 1000 members and 30, if the company has more than 5000 members.
10	A private company can provide financial assistance to a person for purchasing shares of the company.	A public company cannot do so.
11	If a private company is converted into a public company no statutory approval is necessary.	If a public company is converted into a private company, prior approval of the tribunal is required.
12	Articles of the private company relating to entrenchment can be amended only if agreed to by all its members.	Articles of the public company relating to entrenchment can be amended by a special resolution by its shareholders.
13	A private company can accept deposits from any of its members.	Public companies having the prescribed net worth or turn over can accept deposits from persons other than members, subject to compliance with certain conditions.
14	Private companies need not prepare reports on each annual meeting.	Listed Public companies are required to prepare reports on each annual meeting.
15	A private company need not appoint independent directors.	Listed public companies must have independent directors constituting atleast one-third of the total number of directors, and public companies having the prescribed share capital or turnover or having loans, debentures or deposits exceeding certain prescribed limits must appoint at least two independent directors.
16	Contracts of employment of managing or whole time directors need not be kept at the registered office.	Contracts of employment of managing or whole time directors must be kept at the registered office.
17	A private company can insert a clause in its memorandum or articles stipulating that the provisions of S 43 of the Act and S 47 shall not apply. (S 43 deals with kinds of share capital and S 47 deal with voting rights of shareholders)	A public company cannot do so. The provisions of S 43 of the Act and S 47 shall apply to all public companies.
18	90% of the members of a private company can agree to provide shorter time limits for the shareholders to opt for shares in the case of further issue of shares or for the notice to be sent to shareholders in respect of such shares.	A public company has to adhere to the time limits provided in S.62 of the Act and cannot provide for a shorter period.
19	A private company fulfilling the prescribe conditions is not subject to restrictions on purchase by a company of its own shares (S 67).	A public company is subject to restrictions contained in S. 67 regarding purchase by a company of its own shares.
20	A private company may not provide in its articles that the provisions of S 101 to 107 and S 109 dealing with notice of meetings, quorum, and proxies and voting will not apply to it.	A public company cannot do so. The provisions of S 101 to 107 and S 109 will apply to it.
21	A privates company is not required to comply with certain conditions regarding acceptance of deposits from its members if it fulfils certain conditions.	A public company is required to comply with certain conditions regarding acceptance of deposits from its members as prescribed under S.73 of the Act.
22	The provisions of S 160 of the Act, which deals with persons other than retiring directors wishing to stand for directorship of the company, is not applicable to a private company.	A person other than retiring directors can stand for directorship of a public company, if he fulfills the requirements of S160 of the Act.
23	A private company does not have to adhere to the requirements of S 162 of the Act regarding voting on the appointment of each director individually.	A public company is required to adhere to the requirements of S 162 of the Act and ensure that the appointment of directors is voted individually.
24	A private company is not subject to restrictions on the powers of the board of director, contained in S.180 of the Act.	Restrictions on the powers of the board of director, contained in S.180 of the Act , apply to a public company.
25	If an interested director of a private company discloses his interest, he can participate in a meeting of the board of directors.	An interested director of a public company cannot participate in a meeting of the board of directors where a contract or arrangement in which he is interested is discussed.
26	A private company is not restricted to on loans given by a company to its directors if certain conditions are fulfilled.	A public company is subject to restrictions on loans given by a company to its directors.
27	S. 196(4) and S. 196 (5) which make certain provision regarding the appointment of managing directors, whole time directors and managers, do not apply to a private company.	The provisions of S. 196(4) and S. 196 (5) apply to a public company.

NOTE: All points in the distinguish for the private company are also the advantages, benefits and privileges' of a private company.

Conversion of private company into public company

A private company can be converted into a public company if its members pass a special resolution, amending the articles of the company to include all the requirements of a private company referred above. However, no such alteration to the articles has effect unless the same is approved by the Tribunal, which may pass such orders in the matter as deemed fit. The conversion of a private company into a public company can take place in the following three ways:

1. Conversion by choice by operation of law

2. Conversion by default

3. Conversion by operation of law (deemed public company) – the concept of deemed public company was abolished in 2000.

B. Companies limited by guarantee

A company with limited liability may be limited by shares or limited by guarantee. In the case of a company limited by shares, a shareholder is liable only for the unpaid amount of face value of the shares held by him. On the other hand, company limited by guarantee (S .2(21) the memorandum of the company specifies a fixed sum beyond which a member cannot be called upon to contribute of and when the company goes into winding up, and that too, only for the payment of the debts and liabilities of the company.

C. Companies with unlimited liability

Although most companies are incorporated so that its members may enjoy the blessing of limited liability, it is open to the promoters, under S 2(29) of the Act, to incorporate a company with unlimited liability. A company with unlimited liability has no provisions in the memorandum limiting the liability of its members. The liability of all its members is unlimited, similar to liability of partners in the firm.

D. One person companies

The Companies Act, 2013 has introduced the concept of One person company which is defined in S 2(62) of the Act as a company which has one person as its member.

E. Small companies

The Companies Act, 2013 has now introduced the concept of small companies. S . 2(85) of the Act has defined a small company as a company, other than a public company:

a. where the paid up share capital does not exceed Rs.50 Lacs or such higher amount as prescribed (not however being more than Rs 5 Crores),

b. where the turnover, as per the last profit and account , doesn't not exceed Rs.2 Crores or such higher amount as may be prescribed (not being more than Rs. 20 Crores).

However the status of a small company is not available to a company which is a holding or a subsidiary company; a company registered under S.8 of the Act, a company or body corporate governed by any special Act.

F. Associate companies

A new concept of Associate companies has been introduced under the 2013 Act. Such a company is defined under S.2(6) of the Act as a company which other company has a significant influence, but which is not subsidiary of such a company. The term also includes a joint venture company.

G. Foreign companies

Under S. 2(42) of the Act, the term 'foreign company' is defined to mean any company or body corporate incorporated outside India:

a. which has a place of business outside India, whether by itself or through an agent, physically or through any electronic mode;

b. which conducts any business activity in India in any manner. (Also refer to S. 380 of the Act)

H. Government companies

S. 2(45) of the Act defined a 'government company' as a company in which not less than 51% of the paid up capital is held by ;

a. the Central Government; or

b. the State Government; or

c. partly by the Central Government and partly by one or more the State Governments.

A subsidiary of a government company is also deemed to be a government company. All the provisions of the Act apply to government companies. The auditor of a government company is appointed by the Comptroller and Auditor General of India. If the Central Government holds shares in such a company, it must prepared an annual report and place it before the Houses of Parliament and if the State Government is a shareholder in such a company, an annual report shall be place before the State Legislature.

I. Non profit companies

S. 8 of the Act deals with a company which is proposed to be registered under the Act as a limited company and which –

a. has its objects , the promotion of commerce , arts and science, sports, education, research, religion, charity , social welfare , protection of the environment or any other object, and

b. intends to apply its profits, if any, or any income in promoting the objects;

c. intends to prohibit the payment of any dividend to its members.

J. Holding and subsidiary company

If company A exercises control over company B in any of the two modes f=given below, A becomes the holding company and B becomes the subsidiary company of A.

1. a company becomes a holding company of another company by controlling the composition of the board of directors of the other.

2. a company can become a holding company of another via the route of shareholding.

K. Illegal associations

S 464 of the Act therefore provides that no association or partnership consisting of the prescribed number of persons can be formed for the purpose of carrying on any business which has for its object, the acquisition of gain by association or partnership or by the individual members thereof, unless it is registered as a company under the Companies Act, 2013 or under any other Law. The Act also specifies that the prescribed number cannot be more than 100 persons. Under the Companies Rules 2014, the maximum number notified for this purpose is, for the time being , 50 persons. This provision can be applicable only in 4 conditions;

1. the association has more than the prescribed number of members.

2. the association has been formed for the purpose of carrying on a business.

3. the object of the association is to make profit for itself and for its members and

4. the association is not registered as a company under the Act or any other law in India.

This provision doesn't apply to :

1. a Hindu undivided family carrying on any business and,

2. an association or partnership, if the same is formed by professionals who are governed by special Acts.

L. Producer companies

Producer Company is a company registered under the Companies Act, 2013, which has the objective of production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of primary produce of the Members or import of goods or services for their benefit.

Promotors

Although the word promoter is more of a business, rather than a legal term, S. 2(69) of the Act attempts a definition of the term in the following words:

"Promoter" means a person –

a. who has been named as promoter in a prospectus, or

b. who is identifies by the company as a promoter in its annual returns, or

c. who has control over the affairs of the company, directly or indirectly, whether as a shareholder, director or otherwise, or

d. in accordance with whose advice, directions or restrictions the Board of Directors of the company is accustomed to act. (this does not cover a person acting merely in a professional capacity)

According to Charlesworth and Morse,-

"Before a company can be formed, there must be some persons who have the intention to form a company and who take the necessary steps to carry the intention into operation. Such persons are called promoters". Promoters are persons who get together to form a company. The main question of fact as to whether a person can be considered as a promoter depends on what is the role played by him in the incorporation of the company. However as stated herein, a person who is involved in the formation of a company only in his professional capacity, as for instance, a solicitor or a chartered accountant, is not a promoter.

A review of case laws indicates that the law imposes a two- fold fiduciary duty to a promoter namely:

a. a duty not to make a secret profit out of the promotion of the company, and

b. a duty not to disclose any interest which he may have in transaction entered into by the company.

Liability of promoters under a Prospectus

S.35 of the Act imposes a civil liability on certain persons, including the promoters, for misstatements in a Prospectus. If a person subscribes for the shares or debentures of a company on the faith of statement contained in the Prospectus issues by the company, he can sue the persons mentioned in the said section including promoters of the company for any loss or damage sustained by him by reason of any untrue or misleading statement in the Prospectus.

Liability of promoters in respect to allotment of shares

When a company issues Prospectus, all the money which is received by it from applicants for the shares is to be kept deposited in a Scheduled Bank. If the entire amount payable on the application for shares in respect of the minimum subscription as states in the Prospectus has not been received by the company within the prescribed time, all money received by it from the applicants is to be returned to such applicants within the stipulated period. If there is any contravention of this provision by, inter alia, a promoter, he becomes punishable with fine which may extend to Rs. 1 Lac or Rs.1,000 for each day of default, whichever is less. [S. 39]

Liability of promoters at the time of winding up

If the Tribunal has passed an order for the winding up of a company, and the liquidator has made a report to the tribunal that, in his opinion, a fraud has been committed by a person, inter alia, in the promotion of the company, the Tribunal can order such a person including the promoter to be examined by the Tribunal.[S. 300]

Pre incorporation contracts: liability of promoters

Very often, the promoters enter into contracts with third parties, purporting to act on behalf of the company which is yet to be formed. Such a contract does not bind the company, as it was not in existence at the time of the contract. As is well established, two consenting parties must exist before a contract can be entered into and since the company has no legal existence before it is incorporated, such contract cannot bind the company – although the promoter who signed the contract would be bound by it.

Functions of the Promoters: The various functions of the promoters are summarized hereunder:

1. to settle the company's name by ascertaining that the same may be accepted by the Registrar of the Companies.

2. to settle the details of the Memorandum of Association and Articles of Association of the company.

3. to settle nomination of Directors, solicitors, auditors, bankers, secretary of the company.

4. to settle the assertion and fixation of registered office of the company.

5. to settle and ascertain the issue of prospectus requiring a public issue, if any.