1. Introduction to a Company
A company is a legal business organization created under law (Companies Act, 2013) that has a separate legal identity from the people who own or manage it.
Simple Example:
Tata Motors Ltd continues to exist even if the shareholders change. The company has its own identity.
2. Characteristics of a Company
1. Separate Legal Entity
The company is treated as a person in the eyes of law.
✔ It can own property
✔ It can sue and be sued
Example:
Reliance Industries can buy land in its own name.
2. Limited Liability
The liability of shareholders is limited to the amount unpaid on shares.
They are not personally responsible for company debts.
Example:
If a company fails, shareholders lose only their investment—not personal assets.
3. Perpetual Succession
A company continues to exist even if members die, resign, or change.
Example:
Infosys does not close if a director leaves.
4. Separate Management
Shareholders own the company, but Board of Directors manages it.
5. Transferability of Shares
In a public company, shares can be freely bought and sold.
Example:
Buying shares of SBI on the stock exchange.
6. Artificial Legal Person
A company is created by law, not a human being.
It acts through directors and employees.
A company has a separate legal identity from its members.
This separation is like a veil (curtain) between:
· the company
· and the people who own/manage it (shareholders/directors)
In certain situations, courts ignore the separate identity of the company and look at:
· who is actually controlling it,
· who is responsible for wrongdoing,
· whether the company is being misused.
This process is called “Lifting” or “Piercing” the Corporate Veil.
It means the court removes the legal protection of the company and holds the real people responsible.
If a company is created only to cheat people, avoid repayment of loans, or escape legal responsibility, courts lift the veil.
Mr. A owes ₹10 lakhs.
He creates a company and transfers all his property to it.
Then he says, “I have no money personally.”
👉 Court will lift the veil and make Mr. A personally liable.
📌 Reason: Company was used as a tool for fraud.
If a person uses a company to escape a legal duty, courts will ignore the company.
Mr. X agrees not to start a competing business.
He forms a company in his wife’s name and runs the same business.
👉 Court will lift the veil and stop Mr. X.
📚 Case: Gilford Motor Co. v. Horne
If a company is formed only to reduce or avoid tax, courts lift the veil.
An individual transfers income to a company to pay less tax.
👉 Court will treat the income as personal income.
📌 Reason: Company used for tax evasion.
If a company has no independent decision-making power and works only as an agent of its owners, the veil is lifted.
A parent company controls:
· Board of directors
· Finances
· Policies of its subsidiary
👉 Subsidiary is only a name, real controller is parent company.
📚 Case: Smith, Stone & Knight Ltd.
During war, courts must check who actually controls the company.
A company is registered in India,
but controlled by citizens of an enemy country during war.
👉 Court lifts the veil and treats it as an enemy company.
📚 Case: Daimler Co. Ltd. v. Continental Tyre
When public safety, health, or welfare is involved, courts lift the veil.
A factory causes pollution.
Directors hide behind company name.
👉 Court holds directors personally responsible.
If false statements are made to attract investors, directors are personally liable.
Company shows fake profits in prospectus.
Public invests money.
👉 Court lifts the veil and punishes directors.
📌 Companies Act, 2013 – Section 35
If business is run with intention to defraud creditors.
Company takes loans knowing it will never repay.
👉 Directors are personally liable.
📌 Section 339 & Section 447
A company is an association of persons incorporated under law, having a separate legal entity, perpetual succession, and limited liability.
Companies are classified on various bases for legal and administrative convenience.
· Incorporated by a Royal Charter issued by the Crown.
· Governed by the terms of the charter.
· Mostly of historical importance.
📌 Example:
· East India Company
📌 Note: Such companies do not exist in modern Indian corporate practice.
· Formed by a special Act of Parliament or State Legislature.
· Powers and functions are defined by the statute creating them.
· Not registered under the Companies Act.
📌 Examples:
· Reserve Bank of India (RBI)
· Life Insurance Corporation of India (LIC)
· Food Corporation of India (FCI)
📌 Characteristics:
· Enjoy sovereign protection
· Have public accountability
· Incorporated under the Companies Act, 2013.
· Governed by the provisions of the Act.
📌 Examples:
· Infosys Ltd.
· Tata Steel Ltd.
· Liability of members is limited to the unpaid amount on shares held.
· Most common form of company.
📌 Illustration:
If the face value of a share is ₹10 and ₹7 is paid, liability = ₹3.
📌 Examples:
· Reliance Industries Ltd.
· HDFC Bank Ltd.
· Members agree to contribute a fixed amount in case of winding up.
· Generally used for non-profit activities.
📌 Examples:
· Clubs
· Research associations
· Educational institutions
· Members have unlimited liability.
· Personal assets can be used to pay company debts.
📌 Note: Rare in practice due to high risk.
· Minimum members: 2
· Maximum members: 200
· Restricts transfer of shares
· Cannot invite public to subscribe shares
📌 Example:
· XYZ Private Limited
· Minimum members: 7
· No maximum limit
· Can invite public to subscribe to shares and debentures
📌 Examples:
· ITC Ltd.
· Larsen & Toubro Ltd.
· Introduced under Companies Act, 2013
· Only one member
· Combines benefits of sole proprietorship and company
📌 Example:
· Single-person consultancy firm
· Holding Company – Controls composition of board of another company
· Subsidiary Company – Controlled by a holding company
· Government Company – ≥51% shareholding by Central/State Government
· Foreign Company – Incorporated outside India but operating in India
An association refers to a group of persons who come together for a common objective, which may be:
· Commercial (profit-oriented), or
· Non-commercial (charitable/social)
📌 Legal View:
A company itself is a formal and registered association.
1. Registered Association
· Registered under relevant law.
· Has legal recognition.
📌 Examples:
· Company under Companies Act
· Society under Societies Registration Act
· Trust under Indian Trusts Act
2. Unregistered Association
· Not registered under any law.
· Has limited or no legal recognition.
📌 Examples:
· Informal clubs
· Small unregistered groups
A Not-for-Profit Association is formed not to earn profit, but to promote:
· Charity
· Education
· Religion
· Art
· Science
· Social welfare
Under Companies Act, 2013, these are called Section 8 Companies.
1. No profit distribution
Profits, if any, must be used to promote objectives.
2. No dividend payment
Members do not receive dividends.
3. Limited liability
Can be limited by shares or guarantee.
4. Special privileges
o Exemptions and tax benefits
o Relaxed compliance requirements
📌 Educational Institutions
📌 NGOs
📌 Charitable hospitals
📌 Research foundations
📌 Illustration:
An organization established to provide free medical treatment to poor patients.
An illegal association is an association which:
· Is formed for unlawful purposes, or
· Exceeds the legally permitted number of members without registration
An association formed for profit with more than 50 persons,
without registration as a company, is an illegal association.
1. Association becomes void
2. Members have unlimited personal liability
3. Cannot enter into valid contracts
4. Cannot sue or be sued
5. Members are personally liable for debts
📌 Example 1:
70 persons running a business without registering as a company.
📌 Example 2:
Unregistered chit fund collecting money from the public.
📌 Example 3:
Association formed for smuggling or money laundering.
The formation of a company refers to the legal process by which a company is brought into existence as a separate legal entity under the Companies Act, 2013.
Once formed, the company enjoys:
· Separate legal personality
· Perpetual succession
· Limited liability
The formation of a company generally involves three important stages:
1. Promotion
2. Incorporation (Registration)
3. Commencement of Business
Promotion is the first stage in the formation of a company. It involves all activities undertaken to bring a company into existence.
According to Justice C.J. Bowen:
“A promoter is one who undertakes to form a company and takes the necessary steps to accomplish that purpose.”
1. Discovery of business idea
o Identifying a viable business opportunity.
2. Feasibility study
o Technical, financial, and economic feasibility.
3. Raising capital
o Contacting investors, banks, and financial institutions.
4. Choosing company name
o Applying for name approval through RUN or SPICe+.
5. Preparation of documents
o Drafting Memorandum of Association (MOA) and Articles of Association (AOA).
6. Appointment of professionals
o Advocates, Chartered Accountants, Company Secretaries.
A group of entrepreneurs plans to start a solar energy company in Karnataka. They conduct market research, arrange capital, prepare documents, and appoint directors. This stage is called promotion.
Incorporation is the legal process of registering a company with the Registrar of Companies (ROC).
On incorporation:
· Company becomes a separate legal entity
· It can own property, enter contracts, and sue or be sued
1. Memorandum of Association (MOA)
o Defines the objectives and scope of the company.
2. Articles of Association (AOA)
o Contains internal rules and regulations.
3. SPICe+ form
o Integrated form for incorporation.
4. Declaration by professionals
o Compliance with the Companies Act.
5. Registered office address
6. Details of directors and subscribers
o DIN, PAN, Aadhaar.
After verification, the ROC issues a Certificate of Incorporation, which is conclusive evidence of the company’s existence.
“EcoBuild Constructions Pvt. Ltd.” receives its Certificate of Incorporation on 10th June 2025 and becomes a legally recognized company.
Commencement of business is the stage at which the company becomes eligible to start its business operations.
(a) Private Company
· Can commence business immediately after incorporation.
(b) Public Company
· Must obtain Certificate of Commencement of Business by:
o Issuing a prospectus or filing a statement in lieu of prospectus
o Filing declaration that minimum subscription is received
A public company issues shares to the public and receives minimum subscription. After ROC approval, it starts business operations.
Type of Company
Minimum Members
Commencement
Private Company
2
After incorporation
Public Company
7
After commencement certificate
One Person Company (OPC)
1
After incorporation
1. Company becomes a separate legal entity
2. Members’ liability is limited
3. Company has perpetual succession
4. Company can own property in its own name
5. Company can enter contracts independently
· Established that a company is a separate legal entity distinct from its members.
The formation of a company is a systematic legal process involving promotion, incorporation, and commencement. Each stage is crucial for ensuring the lawful and smooth functioning of the company. Once incorporated, the company acquires a distinct legal personality and enjoys various rights and privileges under the law.
A promoter is a person or group of persons who conceives the idea of forming a company and takes necessary steps to bring the company into existence.
They perform activities such as:
· Preparing the business plan,
· Arranging capital,
· Getting documents prepared,
· Completing registration formalities.
Definition:
According to Justice Cockburn, “A promoter is one who undertakes to form a company with reference to a given project and sets it going.”
1. Conceiving the Business Idea
The promoter originates the concept of forming a company and prepares the basic business plan. This includes identifying the line of business, estimating capital requirements, and deciding the objectives of the proposed company.
2. Conducting Feasibility Investigation
Promoters examine whether the idea can be practically implemented. They study market conditions, profitability, technical viability, and legal requirements so that the company is formed only for a sound and workable project.
3. Assembling Resources and Capital
The promoter arranges necessary finance and other resources such as land, building, plant, key managerial personnel, bankers, auditors, and legal advisers. Without this groundwork the company cannot start functioning after incorporation.
4. Preparation of Preliminary Documents
Promoters get the Memorandum of Association, Articles of Association, and prospectus prepared through professionals. These documents define the constitution of the company and are essential for registration with the Registrar of Companies.
5. Incorporation Formalities
They file required applications, declarations, and fees to obtain the Certificate of Incorporation. Promoters also take steps for name approval and compliance with the Companies Act, 2013.
6. Appointment of First Directors and Commencement Arrangements
Promoters help in selecting the first board of directors and open the first bank account. After incorporation they hand over all documents, property, and contracts to the company.
1. Promoters Are Not Agents of the Company
Since the company has no existence before incorporation, promoters cannot be its agents. Any contract entered into prior to incorporation is a pre-incorporation contract and the company is not automatically bound by it; promoters remain personally liable unless novation takes place.
2. Fiduciary Relationship with the Proposed Company
Promoters stand in a position of trust and confidence toward the company to be formed. They must act honestly, avoid fraud, and protect the interest of the company and prospective shareholders.
3. Duty of Full Disclosure of Interest
If promoters deal with the company—for example selling property or entering contracts—they must clearly disclose their personal interest and profit to the board or shareholders. Concealment of such interest is a breach of duty.
4. Liability to Account for Secret Profits
Any profit made by promoters without disclosure is called secret profit. The company can recover that amount with interest or rescind the contract, because promoters must not unjustly enrich themselves.
5. Liability for Misstatements in Prospectus
Promoters are responsible for the correctness of statements made while raising capital. They can face civil liability for damages and criminal liability for untrue statements under the Companies Act, 2013.
6. Personal Liability for Pre-Incorporation Acts
Expenses and contracts incurred by promoters do not become company liabilities by default. Promoters can claim remuneration or reimbursement only when the company approves them through a valid post-incorporation contract.
7. Right of the Company against Promoters for Fraud or Negligence
If promoters act dishonestly or negligently causing loss, the company or shareholders may sue them for compensation and breach of fiduciary duty.
A pre-incorporation contract is a contract entered into by the promoter on behalf of the proposed company before it receives the Certificate of Incorporation. At this stage the company has no legal existence.
· Since the company is not yet formed, it lacks contractual capacity.
· Therefore the company is not bound by such contracts automatically.
· The promoter who signed the contract is personally liable.
· After incorporation, the company may take over the contract only through novation (fresh contract).
· Made prior to incorporation,
· signed by promoters in their own name,
· adoption requires new agreement.
Provisional contracts are contracts entered into by a company after incorporation but before commencement of business (mainly applicable to public companies under earlier law and conceptually under Companies Act 2013 until all requirements to start business are met).
· The company exists legally, but it is not yet entitled to begin business.
· Such contracts become binding only when the company gets the right to commence business (e.g., filing declaration of commencement).
· If commencement conditions are not fulfilled, the contracts remain in suspense and may lapse.
· made in company’s name,
· conditional on commencement,
· promoters are not liable once signed by compa
1. Name Approval
The promoter must apply to the ROC for approval of the proposed company name through the RUN/SPICe+ facility. The name should not be identical or undesirable as per the Act and trademark rules.
2. Preparation of Documents
For registration, promoters prepare:
· Memorandum of Association (MOA),
· Articles of Association (AOA),
· consent of first directors,
· statutory declarations.
These documents define the objectives, rules, and internal management of the company.
3. Filing with Registrar
The required forms, documents, and prescribed fees are filed electronically with the ROC using SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus).
4. Scrutiny by ROC
The Registrar examines whether all legal requirements are fulfilled. If there are defects, the promoter is asked to rectify them.
5. Issue of Certificate of Incorporation
When satisfied, the ROC issues the Certificate of Incorporation.
This certificate is conclusive proof that the company is duly registered.
6. Corporate Identification Number (CIN)
On registration the company receives CIN, PAN, TAN, and is entered in the register maintained by ROC.