Kinds of Companies I. UNLIMITED COMPANIES

Main advantage of Company to trade with limited liability Yet you can set up Company with unlimited liability Section 12

“Seven or more persons or where the Company to be formed will be a Private Company any two or more persons may form an incorporated Company with or without limited liability”

A Company with no limit on its liability is an unlimited Company very rare

Suitable Where heavy liability not likely And advantages of separate corporate personality

required To have

Articles of Association -> stating number of members and share capital

To be registered

Disadvantage Members liable like in partnership But creditors cannot go directly to members can ask

only to contribute

Advantages Need not have share capital Reduce or increase its capital Purchase its own shares

Unlimited Company may at anytime convert itself as Limited Company

II. GUARANTEE COMPANIES Limited liability means

a) Limit liability by sharesb) Or by Guarantee

Section 13(3)“The Memorandum of a Company limited by Guarantee shall... state that each member undertakes to contribute to the assets of the Company in the event of its being wound up, for payment of the debts and liabilities of the Company,

such amount as maybe required not exceeding a specified amount”

Not necessary to have share capital If it has share capital

a) Subject to restriction applicable to Company with shares

b) No liberty to purchase own shares Only members have right to participate in divisible profits of

Company Division of capital into units is shares

III. FOREIGN COMPANIES Means a Company incorporated outside India Section 591

Company though incorporated outside India, has a place of business in India

Place of businessa) Substantial activity is carried onb) Business like operations are carried on or a reasonably

long period of timec) Summons is within jurisdiction

Documents and particulars to be furnished to Registrar within 30 days

i. Certified copy of Charter, Statute or Memorandum of Association or Instrument constituting Company

ii. Full address of registered or principal office of Company abroad

iii. List of Directors and Secretary and all relevant particulars regarding them

iv. Details of Company Secretaryv. Name and address of person resident in India to accept

summons on behalf of Companyvi. Particulars of office of Company in India

If branch is opened – only accounts of branch office to be included

Foreign Company also bound by following obligations

1. Of state of principal business

2. Registrar at New Delhi

i. To exhibit outside every office or place of business the country of incorporation in English letters and in regional languageTo show liability of members is limited

ii. All correspondence of Company to show the above Failure or above not to invalidate the document but

cannot sue

Accounts of Foreign Company Same as Indian Company

Prospectus of Foreign Company Same as that of Indian Company Additional particulars

i. Instrument containing or defining the Constitution of the Company

ii. Provisions of Law under which Company was incorporated

iii. Address in India where above Instrument may be inspected

iv. Date and country of incorporationv. Address of principle office of business in India if

any

If 51% of share capital in Foreign Company is owned by Indians, all the provisions applicable to companies in India to be applicable

Various provisions of Act to apply to Foreign Companies

IV. GOVERNMENT COMPANIES Section 617

For the purposes of this Act, government companies means a Company in which not less than 51% of the paid up share capital is held by Central Government or by any State Government or Governments or partly by the Central Government or partly by one ore more State Governments and includes a Company which is a subsidiary of a Company as thus defined

Takeover by Central government of Company under Industries Development and Regulation Act, 1951 does not mean Company is converted to Government Company

Special provisions relating to Government Companiesa. Auditor to be appointed for re-appointed by Comptroller

and Auditor General of India

b. Comptroller and Auditor General of India Auditing as per his instructions Can conduct supplementary or test audit of

Companies To call for report from Auditor

c. Central Government to prepare and submit report within three months of Annual Meeting and to be submitted to House of Parliament Also applicable to Government Company in

liquidation Generally Act to apply to Government Companies but

application subject to notification by Central Government in other matters

V. HOLDING COMPANY AND SUBSIDIARIES (SECTION 4) When one Company has control over another Company

Holding Company Subsidiary Company Control is by three ways:

a. Controls composition of Board That is can remove or appoint directors to board Can remove under the following three cases:

Can be appointed only by the exercise of power of Holding Company

Directors of Subsidiary Company mainly because he holds position in Holding Company.

Nominated by Holding Companyb. Holds majority of shares, that is, more than ½ of the

equity share capital of Companyc. Holding Company subsidiary of another Company

Eg. A

B

C

D Therefore D is subsidiary of A and A also

Accounts of Holding Company Balance sheet of holding Company to contain

documents of Subsidiary Companyi. Balance sheet of Subsidiary Companyii. Profit/loss Account Of Subsidiary Companyiii. Copy of report of Board of Directorsiv. Copy of report of Auditors

v. Statement of Holding Companies interest in Subsidiary Company

vi. Unable to obtain above information – report of Board of Director’s to that effect

vii. Non coincidence of financial year – report for in between period

Inspection of Subsidiary’s books of account Holding Company by resolution to appoint inspector to

inspect books of account of Subsidiary Company

Investment in Holding Company Subsidiary Company not to have shares in Holding

Company Not applicable

i. Where subsidiary is Legal Representative of deceased member of Holding Company

ii. Where subsidiary is Trustee During amalgamation Subsidiary to buy shares of

Holding Company

VI. ILLEGAL ASSOCIATIONS Section 11(2)

Association of more than 20 members 10 members in banking business Should be Company

Conditions of Illegality1. Membership is more than 20

10 in case of banking2. Association formed for purpose of business3. Object to earn profits for itself and its members4. Not registered as Company

Not applicable to Hindu Undivided Family (HUF)

Consequences of Illegality1. Unlimited liability/ Personally liable

Members punishable with fine which extends upto Rs. 10,000/-

2. Cannot sue on contract3. Cannot be wound up4. No suit between members for partition or dissolution

VII. PRIVATE COMPANIES Section 3(1)(iii)

It means a Company which in its Articles of Association contains following restrictionsi. Minimum paid up capital

Of Rs. 1 lakh Or as prescribed by Articles of Association

ii. Restriction on transferability of shares Restriction in such a way that maximum limit of

members of fifty Restriction cannot be applicable to Private

Company not being limited by sharesiii. Restriction on membership

50 members Exclusive of employees Joint shareholders to be treated as single member

iv. Prohibition on Issue of Prospectus Company to prohibit invitation to public to

subscribe to shares or debentures of the Company 2000(A)

Should prohibit invitation or acceptance or deposits from persons other than members, directors or relatives

To increase capital to Rs. 1 lakh in two years Failure results in striking off from Register of

Companies, that is, as a Default Company Compulsory to have Articles of Association

Advantages of a Private Company Act to apply to all Private Companies except where

exempted Advantages

1. Subscription 2 members Therefore a close knit group – for eg. Family or

friends

2. Exemption from Prospectus – Provisions Public participation by issue of Prospectus

prohibited Therefore exempt from all restrictions relating

to Prospectus No need to file Statement in Lieu of Prospectus Allot shares without waiting for minimum

subscription Start business on incorporation – need not wait

for obtaining certificate for commencement of business

3. Directors Beneficial exemptions Minimum two directors Directors can be permanent life Directors No retirement on rotation Number of Directors cannot be increased

beyond the permissible maximum in Articles of Association

Directors of Public Companies can’t act as Directors of Private Companies unless consent to Registrar within 30 days of appointment Not applicable to Private Company

Directors Restriction on remuneration not applicable

4. Statutory Meeting Private Company exempted from requirement

of holding statutory meeting and filing statutory report

5. Further issue of Capital Further issue of capitol need not be only to

existing shareholders, can be offered to outsiders

6. Company an Undisclosed Principal Formalities of Undisclosed Principal not

applicable in case of Private Company

7. Disclosure of interest Interested Directors can participate and vote