Company Law and Corporate Laws

What is Company incorporation?

Company incorporation is the legal procedure to form a company or a corporate entity. To carry on a business, it is necessary to register it. The registration or incorporation involves the separation of assets, income from the firm owners and the rights of the investors. There is no legal entity to the corporate if it is not incorporated as a company.

What is the procedure of incorporating a company?

The procedure of the incorporation of the company is mentioned under Section 33 of the Companies Act 2013, by applying with the Registrar of companies, along with the prescribed documents such as – Memorandum of Association and Article of Association.

Four major steps were followed to register a company:

Step 1: Acquire Digital Signature Certificate (DSC)

The Information Technology Act, 2000 for the use of digital signatures on the documents submitted in the electronic form to ensure the security and authenticity of the documents filed electronically.

Step 2: Acquire Director Identification Number (DIN)

The concept of a Director Identification Number (DIN) has been introduced with the insertion of sections 266A to 266G of Companies (Amendment) Act, 2006.

Step 3: Create an account on the MCA portal- New user registration at mca.gov.in

Step 4: Incorporate or Apply for the company to be registered

List of documents required before submission of a company:

  • Original copy of the formal letter issued by the Registrar of the Companies assuring the availability of Company name.
  • DIN of all those directors of a proposed company
  • DSC 
  • Form-1 for incorporation of a company
  • Form-18 for situation or address of the proposed company
  • Form-32 for particulars of proposed directors, managers and secretary

What are the necessities of incorporation of a company?

The incorporation of a company is necessary are as follows:

  • Incorporation is a government procedure for securing a legal entity.
  • After incorporation, like a ‘natural person’, a company can sue and be sued, it can sign contracts and buy and sell property on its own It can be taxed and even commit crimes. 

What are the kinds of incorporation of a company?

Under the Companies Act 2013, here are the kinds of companies that can be incorporated:

  • Private Companies: Under the provision of Sec. 68 of the Act, that private companies can be incorporated. A private company must have at least one member and a maximum of 200 members.  A private company is not traded publicly.
  • One Person Company: Under Sec. 62 of the Act, the One person company can be registered. Evident from the name, if there is more than one member, it can not be registered under this provision. If later any more members join, with the registration of such members, the OPC will turn into a private limited company.
  • Public Limited Company: Under the provision of Sec. 71 of the Act, to incorporate a public limited company, there must be at least seven members and there is no cap for maximum members.
  • Unlimited Company: Under Sec. 92 of the Act, a company with unlimited liabilities refers to the legal obligations to the general partners and sole proprietors for any debts or liabilities. In other words, general partners and sole proprietors are responsible for paying off all of the company debts personally if the company can’t make its payments.
  • Section 8 Company: The Companies Act defines a Section 8 company as one whose objective 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.

What are the advantages of the incorporation of a company?

An incorporated company can enjoy the following advantages:

  • Corporate personality: On incorporation, the company gets a legal entity of its own separate from the owners and shareholders.
  • Limited liabilities: The liabilities of the partners, members and shareholders are specified under this Act. Therefore, no confusion remains regarding the liabilities or carrying on the responsibilities of the members, partners or shareholders.
  • Perpetual Succession: The death or insolvency of individual members does not affect the incorporated company in any way or form. The company will continue to exist indefinitely till the company is shut down.
  • Transferable Share: Under the provision of Sec. 82 of the Companies Act mentions the share or other interests of any member in a company shall be a movable property that shall be transferred in the prescribed manner.
  • Separate Property: A company after incorporation can buy, sell or lease a property in its name, separate from that of its members.

What are the 4 Ps of Corporate Governance?

Corporate Governance is a bit complicated and requires a detailed study to understand it enough. However, on an easier note, the phenomenon of corporate governance can be explained under four Ps- people, purpose, process and performance, they are explained as follows:

  • People: People includes the founders, board of directors, stakeholders and consumers, who determine a purpose, develop a process and evaluate the performance.
  • Purpose: A governance is nothing without a purpose, it exists to achieve a purpose, and a purpose is the guiding force of any business. The policies and the projects are decided according to the purpose of the business.
  • Process: After deciding the policy and purpose of the business, comes the process of achieving it. Corporate governance keeps a critical eye on the processes to achieve the purpose.
  • Performance: The performance of a business is the key to survival in the market. The result of policy and process is into the performance of the operations in the market. The performance is measured by the profit and the value addition made to the company.

What are the Effects of the Companies Act?

The Companies Act withstands frequent amendments for governing business activities and conquers far-reaching internal management and ensuing economic development of the companies. The legislative provisions are issued by the Government of India through a series of circulars that provided a complete procedure required to be followed by a business while undertaking its operational exercise.

The working of the internal management is normally uninterrupted by a judicial review unless there is an act contrary to the law and is generally prejudiced to the interest of the large section of the shareholders of the company.

Winding Up of The Company

The procedure of the liquidation of the asset of the Company is called winding up, when the assets are sold to pay off the debts incurred by the company. Once the company winded up it formally ceases to exist. The winding up can be either of two kinds: 

  • Voluntary Winding Up: The company passes a special resolution for the winding up in the general meeting.
    The board of directors in the meeting should give a declaration that all the required investigations are made and the money received on liquidation shall be used for repayment of the debt. Within 10 days of passing the resolution for company winding up, a notice for appointment of liquidator must be filed with the registrar.
  • Compulsory Winding Up: Tribunal is responsible for this kind of wind up of Companies. Here are the reasons for the same:
  • Uncompensated debts of a Company
  • When a special resolution is established for winding up
  • An illegal act by a company or the administration of the Company
  • If the business is involved in dishonest acts or misconduct
  • If the yearly returns or financial statements are not filed for five consecutive years with the ROC
  • The Tribunal is of the view that the company should windup.

Company Law recent cases

The collective wisdom of the company board is expected to give its due value and the decision would normally be declared invalid if it does not vitiate law and impacts the company’s management and business affairs. In other words, it amounts to enforcing a service contract in the field of private employment that is opposed to the provision of the Specific Relief Act 1963.

A recent judgement of the National Company Law Appellate Tribunal (NCLAT) reinstated Mistry as Tata Sons executive chairman. It argued that Article 75 of the articles of association approved the company to sell the shares by way of a special resolution. NCLAT, bracing the provisions that Article 75 would remain unimpaired, made it obvious that the article itself was valid, and not in disagreement with any lawful provisions of the Companies Act.

Relief granted can be modified, subject to the main theme of the applicability, and prevent from forming any doubt or ambiguity. 

The refurbishment, granted by NCLAT, of Mistry as executive chairperson performs to be beyond the scope of the pleadings. Also, this would result in serious contempt for the day-to-day running of the business by Tata Sons.

The affairs of Tata Sons run on mutual trust. The principle has been recognised and relied upon by NCLAT. 

This is implied in its directions about the appointment of the executive chairman in the future, to the effect that ‘any person on whom both the groups have trust’ be appointed in that post.

Article of Association thorough another recent case

Articles of association are like a contract between shareholders. The Supreme Court has also restated in the 2013 ‘Arun Kumar Agrawal v. Union of India’ case how a court prohibited from sitting in judgment over the commercial or business decision taken by parties to the agreement. After the evaluation and imposing its monetary and financial implications, if not the decision is in clear violation of any statutory provisions or unreasonable or for extraneous considerations or indecent motives.

The judgement by NCLAT was passed on December 18, 2019, while Mistry’s appointed tenure ended on March 31, 2017. It directed reinstatement concerning a period already expired that was beyond the powers of the NCLAT. Tata Sons appears to have been converted into a public company by the provision under Section 43A of the Companies Act, 1956, under the previous legislation. 

However, under the Companies (Amendment) Act, 2000, Section 43A(11) was added, which stipulated that this provision would cease to have an effect, except 43A(2A), where any public company that became private on account of this Amendment of 2000 need only inform the Registrar of Companies that it has converted back to a private company. These provisions appear to have been completely ignored by NCLAT in its deliberation.

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