Nature and Kinds of Companies, Lifting of

Corporate Veil, Incorporation and

Registration of Companies

- Prof. (Dr.) Ritu Gupta

National Law University, Delhi
Learning Outcomes
• Company: meaning and Defining Characteristics
• Kinds of Companies
• Lifting the Corporate Veil
• Formation of Company
• Prospectus
• Online Incorporation of Company
Company: Concept and Origin
• The term “company” is derived from the Latin words ‘com’, meaning
with or together and ‘pains’, meaning bread.
• Originally, it referred to a group of persons who would take their
meals together
• In common parlance, however, a company refers to an assemblage of
people who have come together for some specific purpose;
economic, or otherwise; and who have incorporated themselves into
a distinct legal entity in the form of a corporation for that purpose.
Company: Definition and Meaning
• The Companies Act, 2013 does not define a company in terms of its characteristic
features.
• (Sec. 2(20)): A company incorporated under this Act or under any previous
company law
• Prof Haney – defined a company as ‘an artificial person created by law, having a
separate entity, with a perpetual succession and common seal.'
• Chief Justice Marshall – defined a company as ‘an artificial being, invisible,
intangible, existing only in contemplation of law. Being a mere creation of law, it
possesses only the properties which the charter of its creation confers upon it,
either expressly or as incidental to its very existence.
• “A company is not just a legal institution; but a legal devise for the attainment of
any social or economic end.”
Company: Characteristics and Distinct
Features
• Independent Legal Entity: After incorporation under the Act, a company
becomes an independent legal entity, with an existence separate from its
members
• It has its own identity (name) and seal, its assets and liabilities are separate
and distinct from those of its members. It is capable of owning a property,
incurring debt, having a bank account, employing people, entering into
contracts, and suing and being sued separately.
• Limited Liability: the concept whereby a person’s financial liability is limited to
a fixed sum, most commonly the value of a person’s investment in a company
or partnership with limited liability.
• i.e. a shareholder is not personally for any debts of the company other than for
the value of his investment in that company.
Company: Characteristics and Distinct
Features
• Everlasting Existence: A company does not die or cease to exist unless it is
deliberately wound up or the objective for which it was formed has been
accomplished.
• Death or insolvency of members does not have an effect on the subsistence
of a company.
• Separate Property: Since a company is a distinct legal entity, the company’s
property is its own. A shareholder cannot claim to be the owner of the
company’s property during the existence of the company.
• SC of India held; a shareholder is not the part-owner of the company or its
property; he is only given certain rights by law, i.e., to vote or attend
meetings, or to receive dividends.
Company: Characteristics and Distinct
Features
• Flexibility of Investment: Shares in a company are freely transferable
• When a shareholder transfers his shares to another person, the transferee
steps into the shoes of the transferor and acquires all the rights of the
transferor in respect of those shares. However, private companies can restrict
the right of their members to transfer shares.
• Capacity to sue and be sued: A company can sue or be sued in its own name
as distinct from its members. Similarly, a company has every right to enter into
contractual obligations with other parties.
• Separation of Ownership and Management: A company is administered and
managed by the Board of Directors. Shareholders are simply holders of the
shares in the company and need not necessarily be the managers of the
company.
Company: Characteristics and Distinct
Features
• Proportionate Representation: implies ‘one share – one vote’. This is
in direct contrast to the voting principle of a co-operative society
where the ‘one member – one vote’ principle applies.
• Right to own Property: A company is a distinct legal entity and can
own, transfer, and manage a property in its own way. The company’s
property is its personal property.
• A member cannot claim to be the owner of the company’s property
not only during the existence of the company, but in the event of its
being wound-up too.
Kinds of Companies
Companies can be classified into the following categories:

1. Private and Public Companies

2. Limited and Unlimited Companies
3. One Person Company
4. Small Company
5. Charitable Companies
6. Parent and Subsidiary Companies
7. Government Companies
8. Foreign Company
9. Dormant Company
Private Company
• Private Company: means a company having a minimum paid-up share
capital of one lack rupees
• It is a company which by its articles:
1. Restricts the right to transfer its shares;
2. Except in case of ‘OPC’, limits the number of its members to two hundred; and
3. Prohibits any invitation to the public to subscribe for any securities of the
company.

• If a private company contravenes any of the aforesaid provisions, it ceases

to be a private company and thereby loses all the exemption and
privileges, which it otherwise is entitled to.
Public Company
• Public company: means a company which is not a private company
• “A company which is not a private company and has a minimum paid-up share
capital of five lakh rupees.”
• A public company:
1. Does not restrict the right of its members to transfer their shares;
2. Does not put a ceiling as to maximum number of its members i.e. it can have
unlimited number of members
3. Invites public to subscribe for its securities through initial public offering and is
usually listed on a recognized stock exchange.

• A private company which happens to be a subsidiary of a public company,

shall also be treated as a public company
Conversion of Private Ltd. Co. into a Public
Company
• Private limited company can be converted into a public limited one and vice-versa
through alteration of articles of the company.

• Subject to the provision of this Act and the conditions contained in its memorandum, if
any, a company may, by a special resolution, alter its articles including alterations
having the effect of conversion of:
1. A private company into a public company; or
2. A public company into a private company

• When a company being a private company alters its articles in such a manner that they
no longer include the restrictions and limitations which are required to be included in
the articles of a private company, the company shall, as from the date of such
alteration, cease to be a private company.
Limited Company
• Limited Company: is one wherein the liability of its members is limited either by
share capital or guarantee
• “A company in which the liability of each shareholder or member is limited to the amount
individually invested.”
• Company Limited by shares: most common form of a company used for business
ventures. Here, shareholders have no financial liability in case of fully paid-up shares.
(So, if they've paid for their shares in full, they don't have to pay any additional
money if the company faces financial trouble.
• )
• Company Limited by guarantee: commonly used where companies are formed for
non-commercial purposes, such as clubs or charities. The members guarantee the
payment of certain amounts if the company goes into insolvency, but otherwise they
have no economic rights in relation to the company.
Limited Company
• Company limited by guarantee with a share capital: A company
limited by guarantee with a share capital, a hybrid entity, usually used
where the company is formed for non-commercial purposes, but the
activities of the company are partly funded by investors who expect a
return.
Unlimited Company
• Unlimited Company: A company wherein the liability of its members
are unrestricted.
• Their liability is similar to that of the partners of a conventional
partnership firm.
Companies with Charitable Objects
• Section 8 of Companies Act, 2013 provides for the formation of
companies with charitable objects.
• The CG may grant a license to a person or an association of persons
proposed to be registered under this Act as a ‘limited company; if the
following conditions are fulfilled:
1. The company is formed for the promotion of commerce, art, science,
sports, education, research, social welfare, religion, charity, protection of
the environment or any other such object;
2. It intends to apply its profits, if any, or other income in promoting its above
objects; and
3. It intends to prohibit the payment of any dividend to its members.
Small Company
• The concept of ‘Small Company’ has been introduced for the first time
by the Companies Act, 2013.
• Small Company: is a company (other than public company) whose
paid up capital does not exceed 50 lakhs and turnover as per last
profit and loss account does not exceed 2 crores.
• Therefore, only a private company can be classified as a ‘small
company’.
One Person Company
• One Person Company is a new concept introduced by the Companies
Act, 2013.
• One Person Company: can only formed with only one person (a
natural person who is an Indian citizen and a resident of India) as its
member.
• For the first time, the Act has allowed individuals to incorporate a
company as an OPC – a new vehicle for individuals for carrying on
business with limited liability.
• This is expected to have a significant effect on the way individuals and
family and family owned business operate.
Parent and Subsidiary Companies
• A company shall be deemed to be a subsidiary of another company if:
1. That other company controls the composition of its Board of
directors, or
2. That other company holds more than half of its equity share capital
in face value
3. Where the first mentioned company is a subsidiary company of any
company, which in turn is a subsidiary of that other company. For
example, if company B is subsidiary of company A, and company C is
subsidiary of company B, therefore, company C is also a subsidiary
of company A.
Parent and Subsidiary Companies
• The control of the composition of the Board of directors of the
company means that the parent company has the power, at its
discretion, to appoint or remove all or majority of directors of the
subsidiary company without the consent or concurrence of any other
person.
Government Company
• Government Company: means any company in which not less than
51% of the paid-up share capital is held by the Central and/or State
Government

• Essential Features of a government company:

1. It is formed under the provisions of the Indian Companies Act, 2013
2. The total share capital or 51% or more is held by the government
3. It enjoys the status of a legal entity and therefore it can sue or be sued by
others.
4. The finance of a government company is obtained from the government
and private shareholders
Foreign Company
• Foreign Company: means any company or body corporate
incorporated outside India which,
1. Has a place of business in India by itself or through an agent,
physically or through electronic mode; and
2. Conducts any business activity in India in any other manner [Section
2(42)]

• Thus foreign company is one which is incorporated under the laws of

a different nation but conducts any of its business activities in India in
whatever mode or manner.
Dormant Company
• Dormant Company status is a new phenomenon in the Companies
Act, 2013
• Section 455: ‘where a company is formed and registered under this
Act for a future projector to hold an asset or intellectual property and
has no significant accounting transaction, such a company or an
inactive company may make an application to the Registrar in the
prescribed manner for obtaining the status of a dormant company’.

• Dormant Company is thus: “A company that does not trade and has
no significant business transactions”
Lifting the Corporate Veil
• The doctrine of corporate veil implies that a company has a separate
personality distinct from its members and shareholder.
• This signifies that the company has a life and existence of its own; can
possess a property and deal with it the way it desires; and can sue
and be sued in its personal capacity. And, no shareholder can
individually or jointly claim any ownership rights in the assets of the
company during its continuance of business or on its winding up.
• To facilitate the above, the Act has drawn a thick veil (curtain)
between the company and those who have formed or run it.
Lifting the Corporate Veil
• In a number of cases, the courts have disregarded the Salomon principle (Salomon v
Salomon 1896) as laid down by the HoL.
• Where the corporate personality is being used unjustly or as a sham device, the court will ignore
the cloak (legal fiction) to reach the person(s) under it or reveal the true form and character of the
concerned company.
• This is known as the corporate law concept of ‘lifting or piercing the corporate veil’
• Under this doctrine, a stakeholder (Shareholder or Director) of a company is held liable for
the debts or liabilities of the company despite the general principle that shareholders are
immune from suits in contract or tort that otherwise would only hold the company liable.
In simple terms, the Salomon principle, established in the case Salomon v Salomon in 1896, says
that a company is legally separate from its owners. However, there are situations where courts
may decide to ignore this principle if they believe the company is being used unfairly or
dishonestly. This concept is called "lifting or piercing the corporate veil." Essentially, it means that
the court looks beyond the company's legal status to hold individuals accountable for their actions
or to reveal the true nature of the company.
Formation of a Company:
Introduction
• Any business enterprise in which the capital is raised by the individual
contributions of a group of shareholders is called a joint stock company.
• Section 3: 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; or
(b) two or more persons (but not more than 200), where the company
to be formed is a private company; or
(c) one person, where the company to be formed is to be ‘One Person
Company’ that is to say, a private company, by subscribing their
names to a memorandum and complying with the requirements of the Act
in respect of registration.
Formation of a Company
• The whole process of formation of a joint stock company (in India)
can be divided into two stages, namely,

1. Promotion: Refers to the entire backing process by which a company is

brought into life.
2. Incorporation: or registration is the foremost obligation to be fulfilled to
form any type of company under the Companies Act.

No company can come into existence without being formally registered under
the Act. It is a procedure full of documentary compliance formalities
Promotion
• Refers to the entire backing process by which a company is brought into
life.
• The person who conceive the idea to form a company and initiate the
process of formation of a company are called ‘promoters’. They enter into
preliminary contracts with vendors and make arrangements for
preparation, advertisement, and the circulation of the prospectus, and
arrangement of the necessary capital.
• However, a person who merely acts in his professional capacity on behalf
of a promoter, engaged for drawing up the agreement and other
documents, or one who prepares the blueprints of the projected company
on behalf of the promoters, and is paid in this behalf is not a promoter.
Promoters legal position and role
• Promoters occupy a fiduciary position – a position based on trust and
confidence – in the company. Some duties in this regard include:

1. They should note make any profits secretly at the expense of the company
they promote. They may however, make profits in their dealings with the
company provided they disclose them to the company.
2. They should make full disclosure to the independent BoD, or in the
prospectus of all material facts relating to the formation of the company
including any profits made by them in transaction with the company.
Promoter’s Remuneration
• Besides being reimbursed for preliminary expenses incurred by him in
setting up and registering the company, a promoter may be rewarded by
the company for the efforts undertaken by him in forming the company in
several ways under a valid contract. Some common ways of compensating a
promoter include:

1. Company may pay a lump sum amount for the services rendered
2. Promoter may make profits or earn commission on the transactions entered by
him with the company
3. Promoter may sell his own property to the company for cash or against fully paid
shares in the company at an overvaluation after making full disclosures
4. The promoter may be allotted fully or partly paid-up shares or debentures.
Promoter’s Liability
• In case of default by a promoter in fulfilling his duties, the company
may rescind the contract, and if the former has made some secret
profits on any related transaction, he may be compelled to account
for it.
• Company can sue in case it is not possible to cancel the contract.

The promoter shall be subject to civil as well as criminal liability for

misstatement(s) or omission made in the prospectus, if any.
Civil liability
• Civil liability of misstatement(s) in the prospectus: Section 35: Where
a person has subscribed for securities of a company, acting on any
statement included, or the inclusion or omission of any matter, in the
prospectus which is misleading and has sustained any loss or damage
as a consequence thereof, the promoter shall be liable to pay
compensation to every person who has sustained such loss or
damage
Criminal Liability
Criminal liability for non-compliance of matters to be stated in the
prospectus:

• Section 26: lays down maters to be stated in the prospectus. Non-

compliance of the provision of this section may render a promoter
punishable with imprisonment for a term which may extend to three
years or with fine which shall not be less than fifty thousand rupees
but which may extend to 3 lakh rupees, or both.
Criminal Liability
Criminal liability for misstatement(s) in the prospectus:

• Section 34 read with Section 447: Where a prospectus issued,

circulated or distributed includes any statement which is untrue or
misleading, the promoter shall be criminally liable and may be
punishable with imprisonment for a term which shall not be less than
six months but which may extend to ten years and shall also be liable
to fine which shall not be less than the amount involved in the fraud,
but which may extend to three times the amount involved in the
fraud.
Incorporation
• Incorporation or registration is the foremost obligation to be fulfilled
to form any type of company under the Companies Act. No company
can come into existence without being formally registered under the
Act. Unless and until the formalities are duly complied with, a
company does not have any legal recognition or existence of its own.

• Incorporation: ‘Giving legal form to an association of persons by

registering it under the Companies Act; a procedure full of
documentary formalities’
Documentation for Incorporation
• To register, promoters have to file with the Registrar of Companies (ROC), the
following information:

1. The memorandum of association (MOA) and Articles of Association (AOA)

2. A declaration in prescribed form by an advocate, a chartered accountant, a cost
accountant, or a company secretary, and by a person named in the articles as director,
manager, or secretary that all the requires of this Act have been complied with;
3. An affidavit from each of the subscribers to the memorandum and from persons named
as the first directors, in the articles that eh is not convicted of any offence;
4. The address for correspondence till its registered office is established;
5. The particulars of the persons mentioned in the articles as first directors of the company;
6. The particulars of the interests of the persons mentioned in the articles as first directors
of the company
Certificate of Incorporation and
Corporate Identity Number
• Certificate of incorporation is the most important document to bring a
proposed company into existence.
• Section 2(7): once all required docs have been filed along with the
registration fee, filing fee, stamp duty, etc. the ROC will issue, under
his seal and signature, the ‘certificate of incorporation’ of the
company.
• Certificate of Incorporation: is a document that evidences that the
company bearing a specific name is a registered entity
• Corporate Identity Number: A distinct identity for the company,
included in the certificate of incorporation.
Certificate of Incorporation
• The certificate is the conclusive documentary evidence that the
requirements of the Companies Act have been complied with.
• Section 7(3): On and from the date mentioned in the certificate of
incorporation issued under subsection (2), the Registrar shall allot to
the company a corporate identity number, which shall be a distinct
identity for the company and which shall also be included in the
certificate.
• Section 7(4): The company shall maintain and preserve at its
registered office copies of all documents and information as originally
filed under subsection (1) till its dissolution under the Act.
Consequences of Incorporating on
the Basis of Fake Documentation
• Once the certificate is issued, a company cannot cease its existence unless it is
dissolved by an order of the NCLT (National Company Law Tribunal) or otherwise.

• However, as per Section 7(7): if a company has been incorporated by furnishing any
false or incorrect information, the Tribunal may, on an application made to it, on
being satisfied that the situation so warrants,

1. Pass orders for regulation of the management including changes in its memorandum and
articles,
2. Direct that liability of the members shall be unlimited
3. Direct removal of the name of the Co. from the register of companies
4. Pass an order for the winding up of the company
5. Pass such other orders as it may deem fit.
Consequences of Incorporating on
the Basis of Fake Documentation
• However, before any order is passed under Section 7(7),
1. The company shall be given reasonable opportunity of being heard
in the matter; and
2. The tribunal shall take into consideration the transactions entered
into by the company, including the obligations, if any, contracted or
payment of any liability.
Effect of Incorporation
• From the date of incorporation, such subscribers to the memorandum
and all other persons, shall be a body corporate in the name
contained in the memorandum, capable of exercising all the functions
of an incorporated company under the Act and having perpetual
succession and a common seal with power to acquire, hold and
dispose of property, both movable and immovable, tangible and
intangible, to contract and to sue and be sued, by the said name
[Section 9]