Brief Summary
This comprehensive one-shot video provides a detailed overview of the Companies Act 2013, covering key concepts, definitions, and practical applications relevant to the CA Foundation syllabus. It includes:
- Applicability and definitions within the Companies Act.
- Essential features of a company, including incorporated association, artificial legal person, separate legal entity, perpetual succession, common seal, limited liability and transferability of shares.
- Explanation of the Corporate Veil Theory and its exceptions, supported by relevant case laws.
- Types of share capital, including equity and preference shares, and the concept of differential voting rights (DVR).
- Types of companies based on liability, size, control, and other categories.
- Formation and incorporation processes, including the use of SPICe+ forms and essential documents.
- Doctrines of Constructive Notice, Indoor Management, and Ultra Vires, along with case law examples.
Introduction and Session Overview
The session aims to cover the entire Companies Act in one shot, focusing on providing detailed explanations suitable for students who have already taken classes or are new to the concepts. The tutor emphasises that this "turbo" one-shot is designed to be comprehensive, ensuring that all students can grasp the material regardless of their prior knowledge. The session will cover all topics in the module, including examples, answer-writing techniques, and relevant case laws.
Syllabus Overview and Importance of the Companies Act
The Companies Act 2013 is worth 21 marks in the syllabus. The session will cover the introduction, applicability, definition of a company, classes of companies, incorporation and formation, classification of capital, shares, types of share capital (equity and preference), key documents like the Memorandum and Articles of Association, and important doctrines. The need for the Companies Act arises from the limitations of sole proprietorships and partnerships, offering benefits such as corporate nature, ease of obtaining loans, and limited liability for members.
Applicability of the Companies Act and Definition of a Company
The Companies Act applies to all companies registered under this Act or any previous company law. The Ministry of Corporate Affairs (MCA) oversees the Companies Act, with the Director-General of Corporate Affairs (DGCA) at the top, followed by Regional Directors (RDs) and Registrars of Companies (ROCs). A company is defined as one incorporated under the current or previous company law, registered with the ROC. The Act also applies to insurance, banking, and electricity companies, unless there is inconsistency with their specific acts, in which case those acts prevail.
Features of a Company: Incorporated Association, Artificial Legal Person, and More
Marshall and Heney define a company as an incorporated association and an artificial legal person with a separate legal entity. Key features include perpetual succession (members may come and go, but the company continues), an optional common seal, and limited liability. A company can own property, sue, and be sued separately from its members. The mnemonic "I TOP CLASS" is used to remember these features: Incorporated Association, Transferability of Shares, Perpetual Succession, Common Seal, Limited Liability, Artificial Legal Person, and Separate Legal Entity.
Case Law: Macaura vs. Northern Assurance Co. Ltd. and Separate Legal Entity
The case of Macaura v Northern Assurance illustrates that members do not have an insurable interest in the company's assets. Macaura, who owned a timber company, insured the timber in his own name. When the timber was destroyed by fire, the insurance claim was denied because Macaura, as a shareholder, did not own the timber; the company did. This case reinforces the principle of a separate legal entity, where the company's assets are distinct from its members' assets.
Corporate Veil Theory and Lifting the Corporate Veil
The Corporate Veil Theory states that a company is a separate legal entity from its members, shielding them from the company's debts and liabilities. However, in special circumstances, courts may lift or pierce the corporate veil to look behind the company and hold the members liable. This occurs in cases such as determining the character of an enemy company, protecting revenue, preventing tax evasion, avoiding legal obligations, using a subsidiary as an agent, or conducting fraudulent activities.
Exceptions to the Corporate Veil Theory: Key Cases
Five key exceptions to the Corporate Veil Theory are discussed:
- Determining the Character of an Enemy Company: Daimler Co. Ltd. v Continental Tyre and Rubber Co.
- Protecting Revenue/Preventing Tax Evasion: Dinshaw Maneckjee Petit.
- Avoiding Legal Obligations: Associated Rubber Industry Ltd.
- Subsidiary as an Agent: Merchandise Transport Ltd. v British Transport Commission.
- Fraud/Improper Conduct: Gilford Motor Co. v Horne.
Case Law: Salomon v. Salomon & Co. Ltd. and Separate Legal Entity
Salomon v Salomon & Co. Ltd. confirms that a company is distinct and separate from its members. Salomon transferred his business to a company he formed, taking shares and debentures as payment. When the company failed, Salomon, as a secured creditor, claimed priority over unsecured creditors. The court upheld that the company was a separate entity, and Salomon was entitled to his secured debt, reinforcing the principle of separate legal entity.
Capital, Shares, and Types of Share Capital
Capital is the contribution from various sources, often referred to as common stock, and is expressed in monetary terms. Shares are the smallest units of a company's capital, representing proportional ownership. Types of capital include authorised, issued, subscribed, called-up, and paid-up capital. Share capital can be divided into equity share capital and preference share capital.
Equity Share Capital and Preference Share Capital
Preference share capital has preferential rights regarding dividends and repayment of capital during winding up. Equity share capital, which is not preference share capital, includes uniform voting rights (one share, one vote) and differential voting rights (DVR), where voting rights vary. DVRs can offer higher dividends or lower share prices to compensate for reduced voting power.
Types of Companies: Unlimited, Limited by Shares, and Limited by Guarantee
Companies can be classified based on liability:
- Unlimited Companies: Members have unlimited liability, arising primarily during winding up.
- Limited by Shares: Members' liability is limited to the unpaid amount on their shares.
- Limited by Guarantee: Members guarantee a specific amount to be contributed in the event of winding up.
Private and Public Companies: Key Differences
Private companies are defined by three restrictions: prohibiting public subscription, restricting share transfer, and limiting the number of members to 200. Public companies are those that do not have these restrictions. A private company that is a subsidiary of a public company is treated as a deemed public company for compliance purposes.
Counting Members in a Private Company and One Person Company (OPC)
When counting members in a private company, joint holders are counted as one, and present employees who are also members are excluded. Former employees who were members during their employment and continue to hold shares are also excluded. A One Person Company (OPC) has only one member and must appoint a nominee. The member and nominee must be natural persons and Indian citizens, whether resident in India or not.
Small Company and Other Types of Companies
A small company is a type of private company with paid-up share capital not exceeding ₹4 crore and turnover not exceeding ₹40 crore. Holding, subsidiary, Section 8 companies, and companies governed by special acts cannot be small companies. Other types of companies include government companies (where the government holds at least 51% of the shares), foreign companies (incorporated outside India with a place of business in India), dormant companies (formed for future projects or inactive for two years), and Nidhi companies (promoting savings among members).
Holding, Subsidiary, and Associate Companies
A holding company controls another company, known as a subsidiary. Control can be established by controlling the composition of the board of directors or by holding more than one-half of the total voting power. An associate company is one in which another company has significant influence, defined as holding at least 20% but not more than 50% of the total voting power.
Formation and Incorporation of a Company
The formation of a company involves a promoter with a lawful purpose, minimum subscribers (2 for private, 7 for public, 1 for OPC), and compliance with the Act. Incorporation requires a Digital Signature Certificate (DSC) and Director Identification Number (DIN). The SPICe+ form (Simplified Proforma for Incorporating Company Electronically) is used, with Part A for name reservation and Part B for other details. Key documents include the Memorandum of Association (MOA) and Articles of Association (AOA).
Key Documents and the Incorporation Process
The incorporation process involves submitting relevant documents, including the MOA and AOA, and declarations from professionals and subscribers. The MOA includes clauses for name, situation, object, liability, capital, subscription, and nomination (for OPCs). The ROC reviews the documents and issues a Certificate of Incorporation in Form INC-11, which includes the Corporate Identification Number (CIN).
Effect of Incorporation and Alteration of Documents
Upon incorporation, the company becomes a body corporate with perpetual succession, separate property, and the ability to sue and be sued. Subscribers become members. The MOA and AOA are agreements between the company and its members, creating binding forces. The AOA can be altered more easily than the MOA.
Doctrines: Constructive Notice and Indoor Management
The Doctrine of Constructive Notice presumes that outsiders have knowledge of the contents of the company's public documents (MOA and AOA). The Doctrine of Indoor Management (Turquand Rule) protects outsiders dealing in good faith with a company by assuming that internal procedures have been complied with. Exceptions to the Doctrine of Indoor Management include actual or constructive knowledge of irregularity, suspicion of irregularity, and forgery.
Doctrine of Ultra Vires and Conclusion
The Doctrine of Ultra Vires states that any act beyond the company's powers (as defined in its MOA) is void ab initio. Directors are personally liable for misapplying funds received through ultra vires acts. The doctrine ensures that company activities are controlled and that directors act within their authority. The session concludes with a summary of key points and encouragement for students to review additional resources.
