The definition of “Company” is the as in the previous Act. The supreme court of India has
observed that a Company is in some respect, an institution like a state functioning under its
basic constitution consisting of the companies Act and the memorandum of association. A
Company is a legal person or legal entity separate from and capable of surviving beyond the
lives of its members. Like any juristic person, a Company is legally an entity apart from ifs
members, capable of right and duties of its own and endowed with the potential of perpetual
succession. There are mainly three kinds of companies as per section 5 of the companies Act,
1994 viz; _ (1) Company limited by share (2) Company limited by Guarantee (3) Company
with unlimited liability.
Definition of Company limited by shares
According to section 5(a) “Company limited by shares are those in which the capital is of fixed
amount divided into member of shares and in which the liability of the members do not exceed
the face value of his share.”
Companies limited by shares are two kinds. There are
Private Company: As defined in section 2(1) (k) “A Private Company is a company which by
its articles of association restricts the right of transfer of the share, limits the number of
members to fifty and prohibits invitation to the public to subscribe to the shares or debentures
of the company.” As per
Section 5 “A Private Company can be formed any two or more persons.”
Public Company: As defined in section 2(1) (j) “Public Company means a company
incorporated under this Act or under any law at any time in force before commencement of this
Act and which is not a private company.” As per section 5 “A Public Company can be formed
by at least seven persons as members and the membership are open to the public.”
Government Company is a company which either registered as a Private Company or as a
Public company with the Registrar of Companies under the Companies Act, 1956, & the
Government has taken over or purchased 51% or more capital of the company. The remaining
capital may be taken over by the public.
According to Section 617 of the Indian Companies Act, 1956, a Government company means,
"any company in which not less than fifty one percent of the share capital is held by the Central
Government or any State Government or partly by the Central Government and partly by one
or more State Governments"
Features of Government Companies:
(1) Formation: Government Company is formed & registered under Indian Companies Act,
1956, either as a Private company or Public company.
(2) Ownership: It may be partly or wholly owned by Government. State Government or
Central Government or both may own the Government Company. If it is partly owned by
Government then at least 51% of the capital must be taken over by the government.
(3) Management: Management of Government Company is vested in the hands of Board of
Directors. The Directors may be nominated by government or even the shareholders can
appoint the Board of Directors.
(4) Separate Legal Status: A Government company, like a joint stock company is an
incorporated association & artificial person having a common seal & perpetual succession. It
has a separate legal entity from its owners.
(5) Body Corporate: A Government company is incorporated under the Indian Companies
Act, 1956. It enjoys the status of body corporate. "It can enter into contract in its own name &
can acquire properties in its own name. It can sue & can sue by others
(6) Employees: The employees & other staff members in government company are appointed
by the company itself. The employees are neither government servants nor they work under
civil servants; the government may in exceptional cases nominate some top executives.
(7) Capital Collection: A government company requires huge capital for its business
operations. The company is free to collect capital through its own sources & it can even borrow
the money depending upon its requirements.
(8) Approval of Accounts: Government company has to place its Annual Accounts & Annual
Reports for the approval of Legislature Assembly or Parliament as it is compulsory as per the
(9) Flexibility: A government company enjoys full flexibility in its operations. It is free to
adopt different changing policies according to changing business environment.
(10) Exemptions: A government company is exempted from Budgetary Accounting & Audit.
But, its Auditors are appointed by the government as per the guidance of controller & Auditor
General of India.
Difference between a public company and a private company:
The distinction between a public company and a private company are explained in the
1. Minimum number of members
The minimum number of person required to form a public company is seven, whereas in a
private company their number is only two.
2. Maximum number of members
There is no limit on the maximum number of member of a public company, but a private
company cannot have more than fifty members excluding past and present employees.
3. Commencement of Business
A private company can commence its business as soon as it is incorporated. But a public
company shall not commence its business immediately unless it has been granted the certificate
of commencement of business.
4. Invitation to public
A public company by issuing a prospectus may invite public to subscribe to its shares whereas
a private company cannot extend such invitation to the public.
5. Transferability of shares
There is no restriction on the transfer of share In the case of public company whereas a private
company by its articles must restrict the right of members to transfer the share.
6. Number of Directors
A public company must have at least three directors whereas a private company may have two
7. Statutory Meeting
A public company must hold a statutory meeting and file with the register a statutory report.
But in a private company there are no such obligations.
8. Restrictions on the appointment of Directors
A director of a public company shall file with the register consent to act as such. He shall sign
the memorandum and enter into a contact for qualification shares. He cannot vote or take part
in the discussion on a contract in which he is interested. Two-thirds of the directors of a public
company must retire by rotation. These restrictions do not apply to a private company.
9. Managerial Remuneration
Total managerial remuneration in the case of public company cannot exceed 11% of net profits,
but in the case of inadequacy of profit a minimum of Rs. 50, 000 can be paid. These restrictions
do not apply to a private company.
10. Further Issue of Capital
A public company proposing further issue of shares must offer them to the existing members. A
private company is free to allot new issue to outsiders.
A private company has to use words ‘private limited’ at the end of its name. But a public
company has to use only the word ‘Limited’ at the end of its name.
Before a Company is incorporated, or in the process of incorporation, it is common for
someone laid the groundwork of the Company. In practice, one does not always wait to receive
the Certificate of Incorporation before commencing business. Negotiations for the purchase of
material or land would already have commenced. The people who take the responsibility of
starting the Company are referred to as Promoters.
Promotion of a company is concerned with taking the steps necessary for incorporation.
"Promoter" is not defined in the Companies Act. In Tengku Abdullah v Mohd Latiff bin
Shah Mohd, Gopal Sri Ram JCA said: "A promoter is one who starts off a venture-any
venture-not solely for himself, but for others, but of whom, he may be one."
However the most cited case in this regard is Twycross v Grant where CJ Cockburn
said, “one who undertakes to form a company with reference to a given subject and to set it
going and who takes all the necessary steps to accomplish that purpose.'
The promoter lays the foundations for a Company in terms of negotiations, registration
of the Company, obtaining directors and shareholders and preparing all the paperwork.
However, because the Promoter is such an important person in the formation of the
company, the law places several responsibilities on him. These are known as fiduciary duties.
Person who are not promoter
Person who is an employee or agent of the promoter e.g. an advocate
person who provides only professional help or advice
a shareholders [ Thiruvengadachariar vs Mudaliar (1938) ]
Function of the Promoter
1. The promoter decides the company name and asserts that it will be accepted by the
registrar of companies.
2. He decides the details of the company memorandum and an article, the nomination of
director’s solicitors, auditors, bankers and the registered office of the company.
3. He makes arrangement for printing the memorandum and Articles, the registration of a
company and the issue of prospectus.
4. He is responsible to bring the company into existence.
# Duties of a Promoter:
Though some consider the term ‘function’ similar to the term ‘duties’, but to me, duties are
wider than the mere concept of function. It involves something more responsibilities. The
duties of a promoter, however, include the followings:-
(i) Fiduciary duties;
(ii) Duty to disclose;
(i) Fiduciary duties:
Two things involve with the fiduciary duties of promoter –
(a) He is not allowed to make any secret profits; and
(b) He is not allowed to derive a profit from the sale of his own property unless allDisclosed.
So, from the moment he acts with the company in mind, a promoter stands in a fiduciary
position towards the company. [Henderson vs The Huntington Lopper etc. Co. Ltd (1877)]
Damages for Breach of Fiduciary Duties: In the case of RE LEEDS & HANLEY
THEATRES OF VARIETIES LTD. (1902)
The Court ordered the Promoter to pay damages to the Company. The Court held that the
Promoters had fraudulently omitted to disclose the profit made by t hem on the sale of the
property to the Company. The amount of damages was equivalent to the amount of profit made
by the promoters.
(ii) Duty of disclose:
Whenever, a promoter keeps fiduciary relation with the company, he has full liability to
disclose to the company about any profit made by him out of promotion, e.g a profit on a sale
of property to the company.
The disclosure must be made to either –
(i) An independent board of directors, or [Erlanger vs New Sombrero Phosphate Co. Ltd
(ii) The existing and intended share holders, e.g by making disclosure in a prospectus.
[Lagunas Nitrate Co. vs Lagunas Syndicate(1899)]
However, it must also be kept in mind that a half disclosure is not a disclosure in the eye of law
so the disclosure must be full and complete. [ Gluckstein – Vs- Barnes (1990) ]
Consequence of non – disclosure:
If a sell is made or a contract is entered into without making a full disclosure then the following
consequences may be found:
(i) In case of sale, the sale may be set aside at the instance of the company ;
(ii) The company is not bound by the contract;
(iii) If it is found that the recession of the contract is not possible, the company may Claim damage.
# Liabilities of Promoters: The promoters have the following liabilities:
(i) Liabilities in case of secret Profits: As said earlier that the promoters are not allowed to
make any secret profit. If any secret profit is made by the promoter, he is liable to account to
the company for all secret profits made by him. [ Gluckstein – Vs- Barnes(1990) ].
(ii) Earned profits to be communicated to the Board of directors: It is not forbidden for a
promoter to earn profit but it must be reasonable. However, the earned Profits should be
communicated to the board of directors in case of business dealings with the company.
(iii) Liabilities from pre – registered agreement: If the promoter entered into any contract
with the third party before the company had got registered, the liabilities for such contract
incurred upon the promoters. [ Re Impress Engineering Co. (1880) ]
(iv) Liability from Preliminary expenses: The promoters shall be liable for the preliminary
expensed for the formation of the Company until the company gives recognition of such
(v) Liability due to false statement in prospectus: The promoters may be held liable for mis-
statement in the Prospectus. For mis-statement a promoter is liable for paying compensation
under s. 145 and for imprisonment up to five years or with fine under criminal liability
mentioned in section 397 of the companies Act, 1994. Besides, he may be held liable under
(vi) Liability for abuse of powers: The promoter must keep a fiduciary relation with the
Company. So, he must not misuse his power in relation to the formation of the company. In
case of misuse he may be held liable.
(vii) Liability arising from death or insolvency: A promoter is not exempted from his
liability merely by death or insolvency. His liability vests upon the shoulder of his legal
representatives in case of death or insolvency.
There are many cases where Promoters did not remain true to their fiduciary duties. The bottom
line requirement from Promoters is that they must be transparent in their dealings with the
Company. There are three remedies in situations where the Promoters have breached the
2. Recovery of the Secret Profit
3. Damages for breach of Fiduciary Duties or deceit
So we can say that, Promoters have a legal duty not to make a secret profit out of the promotion
of the Company without the Company's consent and also to disclose to the Company any
interests the promoters have in any transaction proposed to be entered into by the Company.
Before registering as a company it need to make some legal documents such as- Memorandum
of association and Articles of association. Which need to be registered.
Memorandum of Association
The Memorandum of Association is a document which contains the fundamental rules
regarding the constitution and activities of a company. It is a basic document which lays down
how the company is to be constituted and what work it shall undertake. It may be termed as the
charter of the company. Section 2(1)(v) of the companies Act, 1994 defines memorandum as
“the memorandum of a company as originally framed or as altered in pursuance of the
provisions of this Act.”
According to Lord Cairns “The memorandum is, as it were, the area beyond which the action
of a company cannot go; inside that area the share holders may make such regulations for their
own government as they think fit.”
From of Memorandum
Section 9 states that the memorandum of every company shall
be divided into paragraphs numbered consecutively; and
be signed by each subscriber, who shall add his address and description in the presence of at least two witnesses who shall attest the signature.
The contents of the Memorandum
Section 6(a) (b) & (c) of the Acts lays down that the memorandum of a association of every
shall contain the following particulars:
Name clause: The name of the company with the word “limited” at the end of a Public
Company and the words “Private limited” at the end of the name of a Private Company.
Situation Clause: The name of the state in which the registered office of the company
is to be situated.
Object clause: The object of the company, the main object and objects incidental and
ancillary to the main object.
Area of operation clause: Except in the case of trading corporations, the state or states
to whose territories the objects extend.
Liability clause: The nature of the liability of the member, such as limited by shares or
by guarantee or unlimited.
Capital clause: In the case of a company having share capital – unless the company is
an unlimited company, the memorandum shall state the amount of share capital and the
division thereof into shares of a fixed amount.
Alteration of Memorandum: Under section 12(1) (2) & (3) a company by special resolution
alter the provision of its memorandum with respect to the object of the company. Clause other
than conditions may be altered generally by special resolutions, as if they are contained in the
articles. A clause in the memorandum regarding the right of dividend of class of share holders
may be altered by special resolution [Rampuria catton Mills Ltd. Re, A (1959)]
Articles of Association
The Articles of Association is a document which contains rules, regulation and bye laws
regarding the internal management of the company. It lays down the regulations for
achievement of the object of the company as per its memorandum as to carry out those objects.
Section 2(1)(u) of the companies Act, 1994 defines Articles as “ the Articles of Association of
a company including, so far as they apply to the company, the regulations contained in the
schedule 1 to this Act.”
Form of Articles
Model forms of articles, for use in the case of companies not limited by shares, are given in
schedule 1 to the Act. Section 19 states that the Articles of every company shall;
be divided into paragraphs numbered consecutively; and
be signed by each subscriber of the memorandum, who shall add his address and
description in the presence of at least two witnesses who shall attest the signature.
Contents of Articles
The Articles of association, describe the powers of the directors, other officers, and of the
shareholders as to voting etc. It also describes the mode and from in which change in the
internal regulation of the company, may from time to time, be made. The Articles of
association cannot go beyond the limit set by it. The contents of articles are: Share capital, right
of shareholders, payment of commission, share certificates, transfer of shares, Lien on shares,
share warrants, alteration of capital etc.
Alteration of the Articles of Association: Under section 20 a company may by special
resolution alter, exclude from or add to its articles and such alteration, exclusion or addition
shall be valid as if originally contained in the Articles.