Preliminary: formula sheet

Key formulas

Key managerial personnel (Sec 2(51))

KMP = CEO or MD or manager + company secretary + whole-time director + CFO + other officer (not more than one level below the directors, in whole-time employment, designated by the Board) + such other officer as may be prescribed

The Board-designated officer must be not more than one level below the directors and in whole-time employment.

Subsidiary company (Sec 2(87))

Subsidiary if holding company (i) controls the composition of the Board, or (ii) exercises or controls more than one-half of the total voting power

Test is control of Board or more than 50% of total voting power. Control through another subsidiary also counts. Holding company is the reverse: a company of which others are subsidiaries.

Associate company (Sec 2(6))

Associate = significant influence, but not a subsidiary; significant influence = control of at least 20% of total voting power, or control of or participation in business decisions under an agreement

Includes a joint venture company. Note 'at least 20%' versus 'more than 50%' for subsidiary.

Small company (Sec 2(85))

Not a public company; paid-up capital ≤ ₹50 lakh (or higher prescribed amount, not more than ₹10 crore) AND turnover ≤ ₹2 crore (or higher prescribed amount, not more than ₹100 crore)

Both conditions must be met. Turnover is taken from the profit and loss account for the immediately preceding financial year. Does not apply to a holding or subsidiary company, a Section 8 company, or a company governed by a special Act. The current prescribed limits are in the Rules; check your updated study material.

Private company (Sec 2(68))

Articles: restrict share transfer + limit members to 200 (except OPC) + prohibit invitation to the public to subscribe for securities

Joint holders count as one member. Employees, and ex-employees who stayed members, are not counted.

Government company (Sec 2(45))

Not less than 51% of paid-up share capital held by Central Government or State Government(s), or both; includes a subsidiary of such a company

The test is 51% or more of paid-up share capital.

Related party: public company limb (Sec 2(76)(v))

Public company in which a director or manager is a director and holds, along with relatives, more than 2% of its paid-up share capital

Both conditions apply: directorship and holding more than 2%.

Financial statement (Sec 2(40))

Balance sheet + profit and loss account (or income and expenditure account) + cash flow statement + statement of changes in equity, if applicable + explanatory notes

OPC, small company and dormant company may not include the cash flow statement.

Foreign company (Sec 2(42))

Incorporated outside India + place of business in India (by itself or through an agent, physically or electronically) + conducts business activity in India in any other manner

Both limbs (a) and (b) must be met.

Separate legal entity

Company ≠ its members

After registration, the company owns assets and owes debts in its own name. Members hold shares only. Cite Salomon v. Salomon & Co. Ltd.

Perpetual succession

Death, insolvency or exit of members ⇒ no effect on the company's existence

The company ends only by a legal process such as winding up or striking off, not by a change in membership.

Limited liability (company limited by shares)

Maximum liability of member = unpaid amount on shares held

For a fully paid share, the member has no further liability to the company.

Minimum members on conversion of existing entity

Section 366(2): company consisting of two or more members; section 366(2)(vii): a company with less than seven members shall register as a private company

Section 366(1) says that, for this Part, the word company includes a partnership firm, LLP, cooperative society, society or any other business entity formed under any other law that applies for registration under this Part. Section 366(2)(vii) says a company with less than seven members shall register as a private company. These are the express words of the Act. Sub-section (2) is worded for a company formed under an Act of Parliament or other law, and it does not itself name a firm. So when you apply (vii) to a firm, present it as your application of section 366(1) and (2)(vii), not as wording the Act states for firms. State these as rules for registration under this Part by existing entities. Do not state them as a rule for fresh incorporation.

Assent for an existing company registering under this Part

Section 366(2)(iv): assent of a majority of members present in person, or by proxy where proxies are allowed, at a general meeting summoned for the purpose. Section 366(2)(v): where a company whose members' liability is not limited by any Act or other law is about to register as a limited company, the majority must be not less than three-fourths of the members present in person or by proxy at the meeting

A firm whose partners have unlimited liability and which registers as a limited company falls in the case of proviso (v). It needs assent at a meeting summoned for the purpose, and the majority must be not less than three-fourths of the members present in person or by proxy where proxies are allowed. Section 366(1) brings a firm within the word company for this Part. Do not say the firm's assent is only 'as prescribed'. Section 374(d) separately requires compliance with other prescribed conditions. Proviso (i) also bars a company registered under the Indian Companies Act, 1882 or 1913 or the Companies Act, 1956 from registering under this section.

LLP conversion to company

Section 374 proviso: LLP is deemed dissolved on registration as a company

No further act or deed is needed for the LLP's dissolution.

Basic rule (Salomon)

Company = separate legal person, distinct from its members

Start every answer with this. Lifting the veil is the exception, not the rule.

Judicial grounds

Sham or cloak + fraud or evasion of obligation, tax or law = veil lifted

Other recognised grounds: enemy character, agency or trust, and group companies treated as one unit in some cases.

Statutory lifting

Specific default in the Act = named persons personally liable

Examples: fraud at incorporation, fraudulent trading, misstatement in prospectus, wrong name use. Give a section number only if you are certain of it.

Gilford Motor Co. v Horne

Company formed to evade covenant = mere cloak; injunction granted

Horne, a former employee, was bound not to solicit his old employer's customers. He formed a company in which his wife and an employee were shareholders and used it to solicit them. The company was held a device to evade the covenant.

Jones v Lipman

Company formed to defeat a contract of sale = mask; specific performance against both

Lipman agreed to sell land, then transferred it to a company he owned and controlled. The court ordered both to perform.

Daimler v Continental Tyre

Control by enemy aliens = enemy character

The company was registered in England, but all its directors and all its shareholders except one were Germans resident in Germany or in enemy territory. The court held that the company had enemy character and could not sue to recover the trade debt during the war.

Re Dinshaw Maneckjee Petit

Sham company used to divert personal income and avoid tax = income taxed in the person's hands

The assessee formed several companies, had his dividend and interest income paid to them, and took the money back as advances or loans to avoid tax on his personal income. The court held the companies were a sham and taxed the income in his hands.

Section 8 conditions

Objects (commerce, art, science, sports, education, research, social welfare, religion, charity, environment etc.) + profits applied only to objects + no dividend to members

All three must be satisfied to the Central Government's satisfaction. A licence is then issued, and the company may omit 'Limited' or 'Private Limited' from its name.

Section 8 alteration and conversion

Alter memorandum or articles only with previous Central Government approval; convert to another kind only after complying with prescribed conditions

Section 8(4). A firm may be a member (Section 8(3)). Such a company enjoys all privileges and obligations of limited companies (Section 8(2)).

Section 8 default penalty

Company: fine ₹10,00,000 to ₹1,00,00,000. Officer in default: fine ₹25,000 to ₹25,00,000

Section 8(11). If affairs were conducted fraudulently, every officer in default is liable under section 447.

Section 8 amalgamation and surplus assets

Amalgamate only with another Section 8 company having similar objects. Surplus assets on winding up go to a similar Section 8 company or are sold and proceeds credited to the Insolvency and Bankruptcy Fund

Section 8(10) and 8(9). The Tribunal may impose conditions on transfer of assets.

Directorship limits

Maximum 20 companies in all, and maximum 10 public companies

Section 165(1). Private companies that are holding or subsidiary of a public company count towards the public company limit. Dormant company directorships are not counted in the 20. Members may by special resolution fix a lesser number (Section 165(2)).

Penalty for breaching directorship limit

₹2,000 per day after the first day, maximum ₹2,00,000

Section 165(6), for a person who accepts appointment in violation of the section.

Board meetings: general rule

First meeting within 30 days of incorporation; at least 4 meetings a year; gap between two meetings not more than 120 days

Section 173(1).

Board meetings: OPC, small and dormant companies

At least 1 meeting in each half of a calendar year; gap between the two meetings not less than 90 days

Section 173(5). Section 173 and section 174 do not apply to an OPC with only one director.

Lesser penalties

Penalty not more than one-half of the penalty specified, subject to maximum ₹2,00,000 for the company and ₹1,00,000 for an officer in default or other person

Section 446B. Applies to OPC, small company, start-up company and Producer Company, where the provision imposes a penalty.

Government company

Not less than 51% of paid-up share capital held by Central Government, State Governments, or both

Definition in section 2(45). Remember the percentage as 'at least 51%'.

Quick revision

• A company is an artificial legal person with a separate legal existence from its members.
• Separate personality: the company owns its property, and members do not own company assets (Salomon, Macaura).
• Perpetual succession: the company continues despite the death, insolvency or exit of members.
• Limited liability: a member's liability is limited to the unpaid amount on shares, or the guaranteed amount in a company limited by guarantee.
• The veil can be lifted by statute or by the courts, for example for fraud, sham, evasion of obligations, agency or enemy character.
• Section 1(4): the Act applies to insurance, banking, electricity and special-Act companies except where inconsistent with their own Act.
• One Person Company has one member, a private company has at least two, and a public company has at least seven.
• A private company restricts transfer of its shares and has a limit of 200 members, with certain exclusions such as employees.
• By liability, companies are limited by shares, limited by guarantee or unlimited.
• A holding-subsidiary relationship is about control of the board or of more than half the voting power.
• A government company is one in which not less than 51% of paid-up share capital is held by the Central or State Government, or both.
• A foreign company is incorporated outside India but has a place of business in India.

Common mistakes

• Treating a company with exactly 50% voting power as a subsidiary. Fix: Section 2(87) says more than one-half of total voting power, or control of the Board composition. Exactly 50% alone does not meet the voting test.
• Confusing associate company (20%) with subsidiary (more than 50%). Fix: Remember: associate means significant influence, at least 20%, and it is not a subsidiary. Subsidiary needs Board control or more than 50%.
• Saying a member owns the company's assets in proportion to his shares. Fix: Write that the company owns its assets. The member owns only shares, which are his own property.
• Saying limited liability means the company's liability is limited. Fix: Write that the liability of the members is limited, to the unpaid amount on shares or to the guaranteed amount in a company limited by guarantee.
• Saying the veil is lifted whenever one person owns almost all the shares. Fix: Salomon shows that a one-man company is still separate. Lift the veil only if there is abuse such as fraud or evasion.
• Mixing up the facts of Gilford and Jones v Lipman. Fix: Gilford is about a restrictive covenant with an employer. Jones v Lipman is about a contract to sell land.
• Saying a Section 8 company can pay dividends if profits are high. Fix: Section 8 requires an intention to prohibit payment of any dividend to members. Profits are applied only to promoting the objects.
• Thinking a Section 8 company can freely alter its memorandum or articles. Fix: For a Section 8 company, alteration needs the previous approval of the Central Government (Section 8(4)).

Exam tips

• Case studies usually give percentages. Write the percentage next to the legal test in your answer, for example '55% is more than 50%'.
• For 'distinguish between' questions, such as holding and subsidiary, or private and public company, use a two-column comparison in your written answer and give at least three points.
• Memorise the KMP list and the officer who is in default list. Both are favourite short-note and MCQ topics.
• In MCQs, watch the words 'at least', 'more than', 'not less than' and 'not exceeding'. One word often decides the correct option.
• For small company questions, state that the prescribed limits in the Rules may be higher than the base figures, and use the limit given in the question or your updated study material.
• For a list question, write the feature name first and the explanation after it. The examiner scans for headings.
• Always include Salomon v. Salomon & Co. Ltd. when asked about separate legal entity, with the holding in one line, but avoid adding details of the case you are unsure about.
• Draw a comparison table in your answer sheet for company vs partnership vs LLP. Use the same five points for each entity so the comparison is easy to mark.