KNOW YOUR LAW #2 - LEGAL CHARACTER OF A COMPANY

PROVISION COVERED	Section 3 read with Section 2
RULE COVERED	Rule 4 of the Companies (Incorporation) Rules, 2014 as amended from time to time
CONCEPT COVERED	Legal character of a company, the number of members required for formation of company, purpose of formation of company, types of companies in terms of liability and nomination in case of One person company

INTRODUCTION:

Section 3 of the Companies Act, 2013 outlines three distinctive aspects namely the purpose for establishment of a company, the minimum number of members required to constitute a legal cum economic structure called company and the character of a company in terms of liability. Rule 4 of Companies (Incorporation) Rules, 2014 on the other hand postulate the aspect of nomination by the member in case of a One person company.

KNOW YOUR DEFINITION:

Section	Concept defined	Definition
2(20)	Meaning of company	Company means a company incorporated under the Companies Act, 2013 or under erstwhile laws that governed companies in India.
2(21)	Company limited by guarantee	A company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.
2(22)	Company limited by shares	A company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them.
2(62)	One person company	One person Company as such entity which has only one person as member.
2(68)	Private Limited company	Private company is the one which by the virtue of its articles restricts the right to transfer its shares, limits the maximum number of members to 200, prohibits invitation from public for subscription to the securities of the company.
2(72)	Public Limited company	A public company shall be the one which is not a private company.
2(92)	Unlimited company	A company not having any limit on the liability of its members

LAWFUL PURPOSE:

A company is characterised as an economic structure established under a statute for a specific purpose. Section 3 categorically appreciates the fact that companies may be formed under the law for only a lawful purpose. The term lawful purpose ought to be attributed to the objects of the company enshrined in the memorandum of association to connote that the objects of company shall be lawful in so far as such objects are not inconsistent or barred by any other law for time being force.

The purpose of a company can be attributed to the objects mentioned in memorandum. The Companies Act does restrict the nature of activity that a company can carry out. In other words, there is no definitive boundary which could be cited to outline what lawful objects are. It could be construed to mean that a company is permitted to operate towards attainment of its objects so far as such objects are not against the interest of public and are not specifically prohibited under any other law or public policy. The Calcutta High Court in case of Indian Iron & Steel Co. Ltd. (1957) postulated that “Our construction is that whatever purpose is not prohibited by law remains a "lawful purpose".

MINIMUM NUMBER OF MEMBERS FOR FORMATION OF COMPANY:

As outlined in Section 3, below listed are the minimum number of members required for formation of company:

Type of company	Number of members
Private Limited company	2
Public Limited company	7
One person company	1

RATIONALE BEHIND DISTINCTION IN TYPE OF COMPANIES:

The foremost reason that could be attributed to the distinction between private limited and public companies could be the source and mobilization of funds in terms of the objects of the company. Private limited companies unlike public companies have definite source of capital and are in better to mobilize funds. However, public companies are measured in terms of size and nature of operations due to which such companies usually approach public as a source of raising funds. One person company on the other hand is a type of private limited which found its inception in Companies Act, 2013. Such type of entity was promoted to encourage entrepreneurship and development of economy.

ONE PERSON COMPANY – KEY OBSERVATION:

The Lok Sabha debate (December 18, 2012):

Shri Sachin Pilot, the then Minister of State of the Ministry of Corporate Affairs during the Lok Sabha session on December 18, 2012 contemplated as follows:

“This Bill (Companies Act, 2013) has path-breaking clauses and schedules inside.  We also now thought of having a one-person company. We have now removed certain restrictions for one-person company. This is a new concept to have a one-person company.  It will give a lot of opportunity for young people to show their entrepreneurial spirit to come forward and invest in our economy.” 

NOMINATION IN CASE OF ONE PERSON COMPANY:

Prior to the incorporation of One person company, the sole subscriber of such entity shall nominate a person by obtaining his consent, who shall in case of death or incapacity to contract of the sole member, shall become the member of the One person company. The name of such nominee shall be stated in the memorandum of association and also in the incorporation form filed with the Registrar of Companies. The consent from such nominee shall be filed with the Registrar in form INC-3.

The rationale behind such nomination could be attributed to sustain perpetual succession with respect to such entity. The Allahabad High Court in “State of U.P. and Anr. v. Jaya Shree Textile & Industries (1984)” held that “A Company as soon as it is registered becomes a body corporate having perpetual succession which only means that the rights and privileges of the Company would not determine or vary upon the death or change of any of the individual members of the company but would continue so long as the company endures and is not dissolved in accordance with the provisions of the Act.”

The nominee is bestowed with the right to withdraw his consent to act as nominee of the sole member by addressing a notice in writing to the sole member and the One person company. The sole member upon the receipt of notice of withdrawal, shall undertake to appoint another person as a nominee within 15 days from the receipt of notice and an intimation in this regard shall be addressed to the One person company by such member and written consent from the new nominee shall be also obtained in form INC-3. The One person company shall within 30 days from receipt of notice of withdrawal from erstwhile nominee, shall post nomination of a new nominee, file with the registrar the intimation of appointment of a new nominee and notice with respect to withdrawal of erstwhile nominee in form INC-4 along with consent received in INC-3. Where a nominee steps into the shoes of the member of One person company in case of death or incapacity of the original sole member, then such new member shall within 15 days appoint a nominee for himself/herself to act as the member of One person company in case of death or incapacity to contract by the new member. In this regard, the company shall intimate the registrar with respect to the cessation of erstwhile sole member and nomination of new member in Form INC-4 within 30 days from the change in membership. In case of change in name of nominee, the sole member is bestowed with the duty to change the name of such nominee in the memorandum of association and such change in name would not amount to alteration of memorandum.

CHARACTER OF COMPANY IN TERMS OF LIABILITY OF MEMBERS:

Section 3(2) enlists the character of company that may be incorporated in terms of liability of members which are elucidated as below:

COMPANY LIMITED BY SHARES:

The liability of each member is constricted to the value of investments made or the number of shares held by such member. If such member has any unpaid amount towards his investment, then the liability of such member would stand in force against such unpaid amount only. E.g. – Reliance Industries Limited

COMPANY LIMITED BY GUARANTEE:

In this structure of company, technically the members of the company are termed as the ‘guarantors’ who by the virtue of the articles of association undertake to contribute at the time of winding up of such company. This kind of company is much suitable for non profit organisations and charitable societies that does not typically distribute profits to the members but rather re-invest the same in another project.  E.g. – Open Source Pharma Foundation

UNLIMITED COMPANY:

Companies Act, 2013 permits unlimited liability of the members. The liability of members extend to their private properties in case where the assets of the company are insufficient to pay off the liabilities. E.g. – Dr. B.R. Ambedkar Development Corporation Limited.

KNOW YOUR FORMS:

·         INC-3 – Consent from nominee with respect to nomination by sole member of One person company. 

·         INC- 4 – Filing of intimation with respect to change of nominee with respect to One person company.

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