Introduction to Companies Act, 2013; Important Definitions
With a phenomenal change in the domestic and international economic landscape, the Government of India decided to replace the Companies Act, 1956 with a new legislation. The Companies Act, 2013, endeavours to make the corporate regulations in India more contemporary.
There are many definitions of a Company by various legal experts. However, Section 2(20) of the Companies Act, 2013, defines the term ‘Company’ as follows: “Company means a company incorporated under this Act or under any previous company law.”
Hence, in order to understand the meaning of a Company, it is important to look at the distinctive features that explain the realm of a Company.
Features of a Company
A Company is a Separate Legal Entity
One of the most distinctive features of a Company, as compared to other organizations, is that it acquires a unique character of being a separate legal entity. Hence, when you register a company, you give it a legal personality with similar rights and powers as a human being.
The existence of a company is distinct and separate from that of its members. It can own property, bank accounts, raise loans, incur liabilities and enter into contracts. According to Law, it is altogether different from the subscribers to the Memorandum of Association.
Also, it has a distinct personality which is different from those who compose it. Member can also contract with the Company and acquire a right against it or incur a liability to it. However, for any debts, the creditors can sue the Company but the members cannot.
A Company can own, enjoy, and dispose of a property in its own name. While the shareholders contribute to the capital and assets, the company is the rightful owner of such assets and capital. Further, the shareholders are not private or joint holders of the company’s property.
Another important feature of a Company is that it continues to carry on its business notwithstanding the death of change of its members until it is wound up on the grounds specified by the Act. Further, the shares of the company change hands infinitely, but that does not affect the existence of the company.
In simple words, the company is an artificial person which is brought into existence by the law. Hence, it can be ended by law alone and is unaffected by the death or insolvency of its members.
One of the important features of a company is the limited liability of its members. The liability of a member depends on the type of company.
- In the case of a limited liability company, the debts of the company in totality do not become the debts of its shareholders. In such a case, the liability of its members is limited to the extent of the nominal value of shares held by them. The shareholders cannot be asked to pay more than the unpaid value of their shares.
- In the case of a company limited by guarantee, members are liable only to the extent of the amount guaranteed by them. Further, this liability arises only when the company goes into liquidation.
- Finally, if it is an unlimited company, then the liability of its members is unlimited too. But such instances are very rare.
Artificial Legal Person
Another one of the features of a company is that it is known as an Artificial Legal Person.
- Artificial: Because its creation is by a process other than natural birth.
- Legal: Because its creation is by law, and
- Person: Because it has similar rights to a human being.
Further, a company can own property, bank accounts, and do everything that a natural person can do except go to jail, marry, take an oath, or practice a learned profession. Hence, it is a legal person in its own sense.
Since a company is an artificial person, it needs humans to function. These humans are Directors who can authenticate the company’s formal acts either on their own or through the common seal of the company.
While a company is an artificial person and works through the agency of human beings, it has an official signature. This is affixed by the officers and employees of the company on all its documents. This official signature is the Common Seal.
However, the Companies (Amendment) Act, 2015 has made the Common Seal optional. Section 9 of the Act does not have the phrase ‘and a common seal’ in it. This provides an alternative mode of authorization for companies who do not wish to have a common seal.
According to this amendment, if a company does not have a common seal, then the authorization shall be done by:
- Two Directors or
- One Director and the Company Secretary (if the company has appointed a Company Secretary).
Section 8 Company
Not all companies have objectives of making profits by carrying out trade and commerce. Many companies primarily have charitable and non-profit objectives. Such entities are referred to as a Section 8 Company because they get recognition under Section 8 of Companies Act, 2013.
The Companies Act defines a Section 8 company as one whose objectives is to promote fields of arts, commerce, science, research, education, sports, charity, social welfare, religion, environment protection, or other similar objectives. These companies also apply their profits towards the furtherance of their cause and do not pay any dividend to their members.
These companies were previously defined under Section 25 of Companies Act, 1956 with more or less the same provisions. The new Act has, however, prescribed more objectives that Section 8 companies can have.
Famous examples of Section 8 companies include Federation of Indian Chambers of Commerce and Industry (FICCI) and Confederation of Indian Industries (CII). The objective of these companies is facilitating the growth of trade and commerce and India.
Features of a Section 8 Company
A Section 8 company comprises of the following distinct features that most other kinds of companies do not have:
- Charitable objectives: Section 8 companies do not aim to make profits. Their objectives are purely charitable in nature. They aim to further causes like science, culture, research, sports, religion, etc.
- No minimum share capital:Section 8 companies, unlike all other companies, do not require a prescribed minimum paid-up share capital.
- Limited liability:Members of these companies can only have limited liability. Their liabilities cannot be unlimited in any case.
- Government license:Such companies can function only if they have the Central Government’s license. The Government can revoke this license as well.
- Privileges:Since these companies possess charitable objectives, the Companies Act has accorded several benefits and exemptions to them.
- Firms as members:Apart from individuals and associations of persons, Section 8 also allows firms to be members of these companies.
Formation of Section 8 Company
A person or an association of persons can make an application to the Registrar of Companies using requisite forms to form a company with charitable objectives under Section 8 of Companies Act. The Central Government, if satisfied, can accept such an application upon any terms and conditions imposed under the license granted by it. Once accepted, the Registrar of Companies will register the company after the applicants pay all requisite fees.
It is important to note that such companies can only be limited companies. All privileges and obligations of limited companies apply in this case. Further, these companies also do not need to include the words “Limited” or “Private Limited” in their names, as all other companies have to.
Since the existence of such companies is based on the license granted to them, they cannot even alter their memorandum or articles of association without the Central Government’s permission. They also cannot do anything that the license disallows.
Cancellation of License
Section 8 companies require a grant of a license by the Central Government. All such licenses are revocable as well on the following grounds:
- The company contravenes provisions of Section 8;
- Terms of the license are violated;
- When its conduct is fraudulent, or it violates its own objectives and public policy.
The Government can even order the company to be wound-up or amalgamated with another similar company under certain circumstances. The Government has to hear the company before passing such orders.