Chapter
Chapter
Chapter-wise Previous Exam Questions at a glance (2019-2024) [B. Com. Hons. & B. Com.]
®
CHAPTER 3
KIND OF COMPANIES
Company Limited by Share and Guarantee
Private Company and Public Company
One Person Company
Holding and Subsidiary Companies
Associate Company
Small Company
Dormant Company
Foreign Company
Government Company
Producer Company
Illegal Association
A company may be incorporated by either a Special Act of the legislature or under the Indian Companies Act, 2013. Accordingly, a company may be: (1) Statutory Company, or (2) Registered Company.
Statutory Company
A company formed by a Special Act passed either by the Central or State Legislature is called a Statutory Company. Statutory companies are governed by the provisions of their special Acts. However, the provisions of the Companies Act, 2013 which are not inconsistent with the special Acts apply to these companies. These companies are usually formed to carry out some special public undertakings requiring extraordinary powers and privileges. The object of such companies is not so much to earn profit but to serve people. The liability of the members of such companies is limited. But in most of the cases, they may
not be required to use the word ‘limited’ as part of their names. Annual Report on the working of each such company is required to be placed on the table of the Legislature (Parliament or State Legislative Assembly as the case may be). The audit of such companies is conducted under the supervision, control and guidance of the Comptroller and Auditor General of India. Some of the important statutory companies are Reserve Bank of India, State Bank of India, Life Insurance Corporation of India, Industrial Finance Corporation, etc.
Registered Company
Company registered under the Indian Companies Act is known as Registered Company. These companies are governed and regulated by the provisions of the Companies Act, 2013. These companies may be limited by shares or limited by guarantee or unlimited companies.
Kinds of Registered Companies
Companies
Kinds of Companies on the Basis of Liability of Members
(
i) Companies Limited by Shares. [Sec. 2(22)] defines “company limited by shares” as a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them; For example if AB Ltd. has a share capital of 10,000 shares of ` 10 each, and A has purchased 100 shares on which he has paid so far ` 6 per share, the maximum liability of A is only ` 4 per share (the unpaid amount).
KIND OF COMPANIES
Also known as ‘Limited Liability Company’, a large majority of companies registered in India belongs to this category. The last word of the name of such company is ‘Limited’ (Ltd. in short).
(ii) Companies Limited by Guarantee . Company limited by guarantee, also called Guarantee Company is a company in which liability of each member is limited to such amount as the members may voluntarily undertake under the memorandum of association to contribute to meet out the deficiency of the assets of the company in the event of its being wound up. The guaranteed amount may differ from member to member [Sec. 2(21)]. The amount guaranteed by each member is in the nature of a reserve capital. It cannot be called up except in the case of winding up of the affairs of the company. No charge can be created on the guarantee of the members. The articles of association of such a company shall state the number of members with which the company is to be registered.
These companies may or may not have share capital. If it has a share capital, liability of members shall be two-fold, firstly liable to pay the amount which remains unpaid on their shares plus the amount payable under the guarantee. The guarantee undertaken by the members would be payable only in the event of winding up of the company.
Also referred as non-trading companies, the objective of these companies is not to earn profits. These companies are usually formed for the promotion of educational or scientific research or for any other kind of social or charitable purposes. Sports club, trade associations, NGOs are usually registered as guarantee companies.
(iii) Unlimited Companies. A company not having any limit on the liability of its members is termed as an unlimited company [Sec. 2(92)]. In the case of an unlimited company, liability of each member extends to the whole amount of the company’s debts and liabilities.
The Articles of an unlimited company should state the number of members with which the company is to be registered. If it has a share capital, the amount of share capital with which the company is to be registered, should also be stated in the Articles.
The personal liability of the members of the unlimited company to contribute towards the payment of its debts is not an asset of the company. It is a contingent liability of the members which will fall due only on the winding up of the company. No charge can be created on the personal liability of the members.
An unlimited company may or may not have any share capital. In case it has any share capital, it can increase or reduce its share capital without any restriction. Such type of companies, though permitted by the Companies Act, is very few in the country.
Difference between Unlimited Company and Partnership Firm
Although the members of an unlimited company are fully liable for the debts incurred by the company like partners of a partnership firm, unlimited company is different from partnership firm:
(i) The creditors of unlimited companies cannot sue the members directly on account of separate legal personality of the company. In case of company fails to pay, the creditors will have to resort to the winding up of the company. The liquidator will call upon the members to contribute towards the assets of the company so as to enable him to meet the debts and the costs of winding up of the company.
(ii) An unlimited company is registered under the Companies Act and is a legal person with perpetual succession and a common seal. A partnership firm on the other hand has no existence as a legal entity.
The Registered Companies (whether limited or unlimited) may be either private or public companies.
(1) Private Companies [Sec. 2(68)]
“Private company” means a company which by its articles:
(i) Restricts the right to transfer its shares;
(ii) Except in case of One Person Company, limits the number of its members to 200. Where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member. In counting this number, the following persons are excluded:
(a) Persons who are in the employment of the company; and
(b) Persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased.
(iii) Prohibits any invitation to the public to subscribe for any securities of the company.
(2) Public Company [Sec. 2(71)]
Public company as defined by Sec. 2(71), means a company which-
(a) is not a private company;
(b) is a company which is subsidiary of a company which is not a private company (i.e. subsidiary of a public company whether constituted as a private company or public company shall be regarded as public company).
A public company must have a minimum of 7 members. The articles of association of public company does not contain the restrictions applicable to a private
company. That is: shares of a public company are freely transferable; there is no restriction on the maximum number of members; and a public company may invite the public to subscribe for any shares in, or debentures of, the company. However, a public company is under no legal binding to invite public to subscribe to its shares or debentures.
Distinction between a Private and a Public Company
Following are the main points of distinction between a private and a public company:
1. Minimum number of members. The minimum number of members required to form a private company is 2, whereas for a public company at least 7 members are needed.
2. Maximum number of members. The maximum number of members in a public company is unlimited. But a private company cannot have more than 200 members excluding the past and present employees of the company.
3. Invitation to public. A private company is prohibited to invite public to subscribe to its share capital. It need not issue a prospectus. But a public company can invite the public to subscribe to its shares or purchase its shares.
4. Public Deposits. A private company cannot accept deposits from the public. But a public company subject to the provisions of the Act may accept public deposits.
5. Transferability of shares. Articles of Association of a private company impose restrictions on the transfer of shares. But the shares of a public company are freely transferable. [Sec 2(68)(i)]
6. Minimum number of Directors. A private company must have minimum two directors whereas a public company must have minimum three directors. [Sec. 149]
7. Retirement of Directors. While directors of a private company are not liable to retire by rotation, at least two third of the directors of public company are rotational directors. [Sec. 152]
8. Managerial Remuneration. In a private company there is no restriction on managerial remuneration, whereas in case of a public company the total managerial remuneration cannot exceed 11% of the net profits of the company.
9. Audit Committee. A private company is not required to constitute an audit committee of the Board of Directors. The listed public companies and other specified public companies are required to constitute audit committee.
Privileges and Exemptions of a Private Company
Since a private company does not involve funds from the public it needs less stringent control from the regulatory provisions. Accordingly, certain provisions of the Companies Act which are applicable to public companies do not apply to private companies. These exemptions are referred as the privileges or advantages of a private company. These are:
1. Members. A private company can be formed with only two persons as members. [Sec. 3]
2. Prospectus. A private company need not issue prospectus. Thus, a private company is exempted from complying with the provisions of the Act regarding the issue of the prospectus. [Sec. 23(1)]
3. Exemption regarding share capital. Restrictions applicable to public companies regarding kinds of share capital, voting rights, issue of shares with disproportionate voting rights and termination of disproportionate excessive rights do not apply to private companies. Further, a private company can give financial assistance for the purchase of subscription of its own shares or its holding company [Sec. 67(2)].
4. Exemption regarding directors. A private company enjoys following exemptions regarding directors:
(i) A private company may have two directors.
(ii) Directors of private company need not retire by rotation.
(iii) Persons holding an office of profit can be appointed as directors of a company without passing a special resolution. [Sec. 149(e)(i)]
(iv) The provision excluding an interested director from participating in voting at board’s proceedings does not apply to a private company.
5. Maximum number of directorship. The restriction as to maximum number of companies of which a person may be appointed as director is 20 in case of private company and 10 in a public company. [Sec. 165(1)].
6. Exemption regarding managerial remuneration. The provisions of the Act regarding fixing or increasing the remuneration of managerial personnel of a company are not applicable to private companies. (Sec. 197)
7. Audit committee. A private company is not required to constitute an audit committee of the Board (Sec. 177).
8. Independent Directors. A private company is exempted from the requirement of appointment of directors.
9. Exemption from Rotation of auditors: Private companies which have a paid-up share capital of less than ` 50 crores do not have to rotate the auditors compulsorily.
Thus, a private company, on one hand, enjoys all the benefits of a joint stock company such as legal entity, perpetual existence, limited liability etc., and on the other hand, it is free from numerous legal restrictions which apply to a public company. This grants it a greater freedom of action than a public company in several respects.
Conversion of a Private Company into a Public Company
A private company may convert into a public company any time by following the provisions of Section 14 of the Companies Act, 2013. The provisions are:
(
a) Passing of a special resolution to alter its articles of association to exclude the restrictions of private company viz. transferability of shares, maximum number of members and prohibition on inviting the public for subscription of securities.
(
b) Filing of altered articles of association along with a copy of special resolution in the prescribed form (INC 27) to the concerned Registrar of Companies within 15 days of passing of resolution. The company shall cease to be a private company as from the date of alteration of articles of association.
Conversion of a Public Company into a Private Company
A public company may convert into a private company any time by following the provisions of Section 14 of the Companies Act, 2013. The provisions are:
(
a) Passing of a special resolution to alter its articles of association to include the restrictions of private company viz. transferability of shares, maximum number of members and invitation to the public for subscription of securities.
(b) Approval of the Central Government. For seeking approval, an application in the prescribed form along with the prescribed fees is to be filed with Regional Director.
(
c) Declaration by key managerial personnel stating that number of it members shall be limited to 200 members and also stating that no deposit has been accepted by the company in violation of the Act.
(
d) A list of creditors and debenture holders of the company drawn up to the latest practicable date (not more than 30 days from the date of filing of application) must also be filed along with the application to the Regional Director.
(
e) Filing of a copy of order of the approval, copy of the altered articles of association along with a copy of special resolution in the prescribed form to the concerned Registrar of Companies within 15 days of approval from the Central Government.
The company shall become a private company from the date of approval from the Central Government.
One Person Company (OPC)
The Companies Act, 2013 introduced the concept of One Person Company (OPC). This has made possible to form a company with only one member. OPC provides benefit of both forms of business—Proprietorship and Company. With formation of an OPC business can be run in same way as a proprietorship by complying with law and keeping liability of the member limited by share or guarantee. Many relaxations have been granted to an OPC in compliance and procedural aspects.
Provisions
(
of
One
Person Company under Companies Act, 2013
i) Section 2(62) of the Act defines OPC as “a company which has only one person as a member”. In One Person Company legal and financial liability is limited to the company only and not to that person (i.e., liability is limited).
(
ii) Section 2(68) of the Act provides that a private company includes OPC. All the provisions of the Act applicable to a private company shall also be applicable to an OPC, unless otherwise excluded from the compliance. Section 3 of the Act also lay down that OPC shall be treated as a private company for all legal purposes with only one member.
(iii) The name of One Person Company shall include the word OPC ‘One Person Company’ within bracket below the name of the Company.
(iv) The person who is to form an OPC has to give a separate name and legal identity to the Company, under which all the activities of the business are to be carried out. Secondly, the person has to nominate a person with that person’s written consent as a nominee of the OPC. This person will be the member in case of existing sole member’s death or disability. This provision will ensure perpetuity and continuity to the life of the company.
Rules regarding One Person Company (OPC)
The Companies (Incorporation) Rules, 2014, as amended by the Companies (Incorporation) Second Amendment Rules, 2021 has laid down the following rules regarding OPC:
(1) Only a natural person who is an Indian citizen and resident in India or otherwise:
(
a) shall be eligible to incorporate a One Person Company;
(b) shall be a nominee for the sole member of a One Person Company.
Explanation.—For the purposes of this rule, the term “resident in India” means a person who has stayed in India for a period of not less than one hundred and eighty two days during the immediately preceding one calendar year.
(2) No person shall be eligible to incorporate more than a One Person Company or become nominee in more than one such company.
(3) Where a natural person, being member in One Person Company in accordance with this rule becomes a member in another such company by virtue of his being a nominee in that One Person Company, such person shall meet the eligibility criteria specified in sub-rule (2) within a period of one hundred and eighty days.
(4) No minor shall become member or nominee of the One Person Company or can hold share with beneficial interest.
(5) Such company cannot be incorporated or converted into a section 8 company.
(6) Such Company cannot carry out Non-Banking Financial Investment activities including investment in securities of any body corporates.
Conversion of One Person Company into a Public Company or a Private Company
The following is the procedure for converting one person company into a public or a private company:
(1) The One Person company shall alter its memorandum and articles by passing a resolution to give effect to the conversion and to make necessary changes incidental thereto.
(2) A One Person company may be converted into a Private or Public Company, other than a company registered under section 8 of the Act, after increasing the minimum number of members and directors to two or seven members and two or three directors, as the case may be, and by making due compliance of section 18 of the Act for conversion.
(3) The company shall file an application in e-Form No. INC-6 for its conversion into Private or Public Company, other than under section 8 of the Act, along with fees as provided in the Companies (Registration Offices and Fees) Rules, 2014 by attaching documents, namely:-
(a) Altered MOA and AOA;
(b) copy of resolution;
(
c) the list of proposed members and its directors along with consent;
(d) list of creditors; and
(e) the latest audited balance sheet and profit and loss account.
(4) On being satisfied that the requirements stated in section 18 of the Act have been complied with, the Registrar shall approve the form and issue the Certificate.
Conversion of a Private Company into a One Person Company
A private company other than a company registered under section 8 of the Act having paid up share capital of ` 50 Lakhs or less and average turnover during the relevant period (Last three financial years) is ` 2 crores or less may convert itself into a One Person company by passing a special resolution in the general meeting.
Exemptions of One Person Company
(a) Number of Directors - Although the Act restricts number of directors to one in case of OPC, there are no constraints to appoint more than one, subject to maximum of 15.
(
b) The sole member who is an individual shall be deemed to be the first director of the OPC.
(
c) The directors of OPC are not required to retire by rotation [section 152(6) (a)].
(
d) If there is only one director, there is no compulsion to conduct Board meetings. In case of more than one director, at least one board meeting twice in the year is required to be held and gap between the two meetings must not be less than 90 days.
(e) The provisions of sections 98, 100 and 111 related to General Meeting, Extraordinary General Meeting, notice and of convening general meeting are not applicable to OPC. If business is required to be transacted at the general meeting by means of ordinary or special resolution it shall be sufficient if the resolution is communicated by the member to company and noted it down in minute’s book and signed and dated by the member.
(f) There is no need to prepare the cash flow statement. [Section 2(40)]
(g) It is sufficient if only one director signs the audited financial statements (section 134)
(h) Central Government may prescribe abridged annual return for OPC.
Holding and Subsidiary Companies
A company which controls another company is known as Holding company, and the company so controlled is termed as Subsidiary company.
As per section 2(87), a company shall be deemed to control another company in each of the following cases:
(1) If it controls the majority composition of the board of directors of another company. The composition of other company’s board of directors shall be deemed to be controlled if it can, at its direction appoint or remove the holders of all or a majority of the directorships.
(2) If it exercises or controls more than one-half of the total voting power (aggregate of paid up equity share capital and convertible preference share capital) either at its own or together with one or more of its subsidiary companies.
(3) A company shall be deemed to be the holding company of another company if another company is a subsidiary of the first mentioned company’s subsidiary (i.e. subsidiary of the subsidiary).
Illustration
Company B is a subsidiary of company A, and company C is a subsidiary of company B Company C is a subsidiary of company A. By virtue of the above provision, if company D is subsidiary of company C, company D will be a subsidiary of company B and consequently also of company A.
A private company which is subsidiary of a public company is regarded as the public company.
A subsidiary company cannot be a member of its holding company and any allotment or transfer of shares in the holding company to its subsidiary will be void.
Restriction on number of layers of Holding Company
As per the Companies (Restriction on Number of Layers) Rules, 2017 (notified on 20th September, 2017), no company shall have more than two layers of subsidiaries, except that—
(i) in case of a company acquiring a company incorporated outside India with subsidiaries beyond two layers as per the laws of such country;
(ii) for computing the number of layers under this rule, one layer which consists of one or more wholly owned subsidiary or subsidiaries shall not be taken into account.
Exception
The provisions of this rule shall not apply to the following companies :
(a) a banking company
(b) a non-banking financial company
(c) an insurance company
(d) a Government company
The companies in existence on or before the commencement of these rules, having number of layers of subsidiaries as specified shall have to inform the
Registrar of Companies in the prescribed form and shall not have any additional layer of subsidiaries over and above the layers existing on such date.
Associate Company
An associate company is one over which another company exercises a degree of control which is less than the degree of control exercised over a subsidiary.
As per section 2(6) of the Companies Act, 2013 “associate company”, in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company. For the purposes of this clause, “significant influence” means control of at least 20% of total voting power, or of business decisions under an agreement.
Differences between Affiliate, Associate and Subsidiary Companies
An associate company is partly owned by another company or group of companies. In most cases, the terms affiliate and associate are used synonymously to describe a company whose parent only possesses a minority stake in the ownership of the company which is 20 to 50% of the paid up equity shares; if more than 50% of the shares are owned by a parent company, it creates a subsidiary. In case of a subsidiary company, another company is a majority shareholder. In a wholly owned subsidiary the parent company owns 100% of the subsidiary.
Small Company
The Companies Act, 2013 has provisions on “small company”. Section 2(85) of the Act defines “Small company” as a company, other than a public company, whose (i) paid-up share capital does not exceed ` 4 crores or such higher amount as may be prescribed; or
(ii) turnover of which as per its last profit and loss account does not exceed ` 40 crore or such higher amount as may be prescribed. However, a small company cannot be
- a holding company or a subsidiary company or
- a company registered under section 8 of the 2013 Act
- a company or body corporate governed by any special Act.
“Turnover” means the aggregate value of the realisation of amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year [section 2(91)].
Company Law – UGCF | NEP
AUTHOR : ANIL KUMAR
PUBLISHER
: TAXMANN
DATE OF PUBLICATION : JANUARY 2025
EDITION : 14TH EDITION | 2025
ISBN NO : 9789364557993
NO. OF PAGES : 304
BINDING TYPE : PAPERBACK Rs.
DESCRIPTION
This book is a thoroughly updated and comprehensive work that analyses India's corporate legal framework with clarity and depth. Building upon the legacy of its highly acclaimed earlier editions, this edition integrates the latest amendments—such as the Companies (Amendment) Acts of 2018 and 2020—and updated rules under the Companies Act, 2013, including the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023. In addition, it incorporates provisions of the Insolvency and Bankruptcy Code, 2016, as applicable to companies, ensuring that readers receive a holistic and contemporary understanding of the legal environment that governs corporate entities in India.
This book is designed with a broad audience in mind. It is an indispensable resource for undergraduate students, professional learners, examinees, professionals and practitioners.
The Present Publication is the 14th Edition | 2025, amended upto 15th December 2024. This book, authored by Prof. Anil Kumar, has the following noteworthy features:
• [Comprehensive Coverage] Includes all relevant legislative updates and amendments, ensuring that readers are well-versed with the most recent changes in the corporate legal landscape
• [Reader-Friendly Approach] Complex legal provisions are explained in clear, accessible language. Case laws and real-life illustrations are woven seamlessly into the narrative, enabling readers to grasp practical applications easily
• [Visual Aids] Flowcharts and summary tables are provided to break down complicated legal procedures, allowing for quick understanding and revision
• [Exam-Orientation] Each chapter concludes with examination-style questions, past exam references, and key case laws, empowering students to prepare methodically for their tests