Notes: Legal Status and Types of Registered Companies

1. Corporate Personality (Separate Legal Entity)

A company is a separate legal entity distinct from its members/shareholders.
Shareholders own shares, not the company’s assets.
A company can own property, enter contracts, sue and be sued in its own name.
Shareholders are not agents of the company.

Important Cases

Salomon v. Salomon & Co. Ltd. (1897)

Established the principle of separate legal entity.
Company is distinct from its members even if one person controls most shares.

Lee v. Lee’s Air Farming Ltd. (1961)

A person can be both shareholder/director and employee of the company.
Company and member are separate legal persons.

Re Kondoli Tea Co. Ltd. (1886)

Transfer of property to a company is a valid transfer even if shareholders remain the same.

2. Company as an Artificial Person

Company is an artificial (juristic) person created by law.
It acts through human agents (directors, officers).
Can:
- Own property
- Enter contracts
- Sue and be sued
- Borrow money

Case

Union Bank of India v. Khader International Construction (2001)

Company is a “person” and can sue as an indigent (poor) person.

3. Perpetual Succession

Meaning

Company continues to exist irrespective of:
- Death
- Insolvency
- Retirement
- Transfer of shares by members
It ends only through legal winding up.

Section 9, Companies Act, 2013

Company has perpetual succession and common legal identity.

Case

Gopalpur Tea Co. Ltd. v. Peshok Tea Co. Ltd.

Company survives despite changes in ownership or membership.

4. Separate Property

Company owns its assets in its own name.
Shareholders have no ownership rights over company property.

Cases

Bacha F. Guzdar v. CIT (1955)

Shareholders are not part owners of company property.

Macaura v. Northern Assurance Co. Ltd. (1925)

Shareholder has no insurable interest in company property.

H.C. Shastri v. Dolphin Canpack Pvt. Ltd.

Directors/shareholders cannot use company assets for personal liabilities.

5. Transferability of Shares

Section 44

Shares are movable property.
Can be transferred according to Articles of Association.

Public Company

Shares freely transferable.

Private Company

Transfer restrictions mandatory through Articles.

Case

V.B. Rangaraj v. V.B. Gopalakrishnan

Restrictions in shareholders’ agreement are enforceable only if included in Articles.

6. Capacity to Sue and Be Sued

Company can:
- File suits
- Defend legal proceedings
- Claim damages
- Sue even its own members

Case

Rajendra Nath Dutta v. Shibendra Nath Mukherjee

Any legal action must be filed in the company’s name, not by directors personally.

7. Company is Not a Citizen

Company is not a citizen under:
- Constitution of India
- Citizenship Act, 1955

Case

State Trading Corporation v. CTO

Company is a legal person but not a citizen.

However:

Company enjoys certain Fundamental Rights available to “persons” (e.g., Article 14).

Nationality and Residence

Company has:
- Nationality
- Residence
- Domicile

8. Limited Liability

Meaning

Liability of members is limited to unpaid amount on shares.

Example

Share value = ₹100
Amount paid = ₹75
Liability = ₹25 only

Exceptions to Limited Liability

Members may become personally liable in cases of:

Reduction of members below statutory minimum (Section 3A).
Unlimited company.
Fraudulent incorporation (Section 7(7)).
Fraudulent conduct of business (Section 339).
Fraudulent prospectus (Section 35).
Fraudulent acceptance of deposits (Section 75).
Fraud detected through investigation (Section 224).

9. Contractual Rights

Company can enter contracts in its own name.
Shareholders are not parties to company contracts.
Shareholders cannot sue or be sued on company contracts.

10. Disadvantages of Registered Companies

Formalities and high compliance costs.
Loss of privacy (ROC filings are public).
Diversified control.
Public accountability.
Possibility of fraud and misuse of funds.

Types of Registered Companies

A. Based on Incorporation

1. Registered Companies

Incorporated under Companies Act, 2013.

2. Statutory Companies

Created by special Act of Parliament/State Legislature.
Example: Life Insurance Corporation of India

B. Based on Liability

1. Company Limited by Shares

Liability limited to unpaid share amount.
Most common form.

2. Company Limited by Guarantee

Members liable up to guaranteed amount.

3. Unlimited Company

Members have unlimited liability.

C. Other Forms of Companies

Section 8 Company

Non-profit company.
Promotes:
- Education
- Charity
- Science
- Sports
- Social welfare

Government Company

At least 51% paid-up capital held by Government.

Holding Company

Controls subsidiary companies.

Subsidiary Company

Holding company:
- Controls Board composition, or
- Controls >50% voting power.

Associate Company

Significant influence (20% or more voting power).

Joint Venture Company

Parties jointly control the arrangement.

Dormant Company

Formed for future project or asset holding.
No significant business activity.

Small Company

Paid-up capital ≤ ₹4 crore.
Turnover ≤ ₹40 crore.
Excludes:
- Public companies
- Holding/Subsidiary companies
- Section 8 companies

Domestic Company

Registered and operating in India.

Private Company

Definition [Section 2(68)]

Must:

Restrict transfer of shares.
Limit members to 200.
Prohibit invitation to public for securities.

Requirements

Minimum Members: 2
Maximum Members: 200
Minimum Directors: 2
No minimum paid-up capital requirement.
Name must end with “Private Limited”.

Characteristics

Limited liability.
Perpetual succession.
Restricted share transfer.
No prospectus.
Easier compliance.

Major Privileges

Easier incorporation.
Only 2 directors required.
No independent director requirement.
No woman director requirement.
Relaxed AGM and Board compliance.
Audit Committee generally not required.
Lesser compliance burden.

Public Company

Definition [Section 2(71)]

Minimum Members: 7
No maximum limit.
Minimum Directors: 3
Shares freely transferable.
Can invite public to subscribe to securities.

Characteristics

Separate legal entity.
Limited liability.
Perpetual succession.
Greater access to capital.
Higher regulatory compliance.

Examples

Bharat Heavy Electricals Limited
Bharat Petroleum Corporation Limited
Coal India Limited
Steel Authority of India Limited
Oil and Natural Gas Corporation

Private Company vs Public Company (Exam Table)

Basis	Private Company	Public Company
Minimum Members	2	7
Maximum Members	200	Unlimited
Minimum Directors	2	3
Transfer of Shares	Restricted	Freely Transferable
Prospectus	Cannot issue	Can issue
Retirement of Directors	Not compulsory	Rotation compulsory
Public Subscription	Not allowed	Allowed
Name Suffix	Pvt. Ltd.	Ltd.

Small Company – Key Benefits

Simplified Annual Return.
Abridged Board Report.
Only 2 Board Meetings per year.
Cash Flow Statement not mandatory.
No compulsory Auditor Rotation.

Current Limits (from 15 Sept 2022)

Paid-up Capital: ≤ ₹4 Crore
Turnover: ≤ ₹40 Crore

Exam-Oriented Keywords

Corporate Personality
Separate Legal Entity
Artificial Person
Perpetual Succession
Separate Property
Limited Liability
Capacity to Sue and Be Sued
Transferability of Shares
Private Company
Public Company
Small Company
Holding Company
Subsidiary Company
Associate Company
Section 8 Company
Government Company
Dormant Company