CA > Foundation > Paper 2 – Skim Notes

Chapter 6: The Companies Act, 2013

Overview

  • Understanding the Companies Act, 2013 and its significance in corporate governance.
  • Exploring the corporate veil theory and its implications.
  • Classification of companies as per the Act and their features.
  • The process of company registration and the essential documents involved.
  • Examining the Memorandum of Association (MOA) and Articles of Association (AOA) and their roles.
  • Understanding the concept of share capital and different types of shares under the Companies Act, 2013.
  • Exploring the doctrines of ultra vires and indoor management.
  • Analyzing the responsibilities of promoters in forming a company.

Key Topics

Company Definition and Features

  • A company is defined as an artificial person created under the Companies Act, 2013 (Section 2(20)).
  • Key features of a company include: Separate Legal Entity, Perpetual Succession, Limited Liability, and Common Seal.
  • The legal personality of a company is distinct from its members, meaning company debts are separate from personal debts of shareholders (Salomon vs. Salomon case).
  • It’s an artificial judicial person that can own property, enter contracts, and cannot be imprisoned.
  • Members hold shares which determine their rights and responsibilities, particularly in terms of liability.

Deep Dive

  • The concept of a ‘corporate veil’ establishes the company’s separate identity.
  • Corporate veil can be lifted in cases of fraud, tax evasion, or when the company acts as an agent for its shareholders.
  • Example: In the case of Dinshaw Maneckjee Petit, the corporate veil was lifted to expose tax evasion.

Registration of Companies

  • Companies must register with the Registrar of Companies (ROC) to gain legal status.
  • Incorporation involves filing necessary documents such as MOA and AOA, along with declarations from promoters and initial directors.
  • SPICe (Simplified Proforma for Incorporating Company Electronically) streamlines the incorporation process.
  • Once registered, companies receive a Certificate of Incorporation, marking their legal existence.
  • Upon incorporation, the company can act as a legal entity distinct from its members, with perpetual succession.

Deep Dive

  • The incorporation process was simplified to encourage ease of doing business in India.
  • The impact of non-compliance during incorporation can lead to consequences for promoters and directors under Section 447.

Classes of Companies under the Companies Act, 2013

  • Companies are categorized based on liability, membership, control, and purpose.
  • Types include: Limited by shares, Limited by guarantee, Unlimited, Private, and Public companies.
  • One Person Company (OPC) was introduced to promote individual entrepreneurship with limited liability.
  • Each type of company has specific characteristics regarding member liability and operational structure.

Deep Dive

  • Public companies can raise capital through the public, while private companies restrict such activities.
  • Government and foreign companies fall under specialized classifications with unique regulations.

Memorandum of Association (MOA) and Articles of Association (AOA)

  • MOA defines the company’s objectives and the scope of its activities.
  • The AOA provides internal regulations for managing the company’s affairs and governance.
  • Both documents are public records that third parties are presumed to know about before entering contracts with a company.
  • Alterations to MOA and AOA require strict compliance per the Companies Act.

Deep Dive

  • The doctrine of ultra vires applies to MOA, meaning activities beyond its scope are void.
  • Articles may be altered by special resolution; MOA alterations often require external approval.

Share Capital and Types of Shares

  • Share capital represents the funds raised by a company through issuing shares to investors.
  • Types of share capital include nominal, issued, subscribed, called up, and paid-up capital.
  • Shares can be classified as equity shares (with voting rights) or preference shares (with preferential rights).
  • Companies must number shares and comply with regulations in transferring them.

Deep Dive

  • Equity shares with differential voting rights allow minority rights while providing higher dividends.
  • Preference shareholders have preferential rights in terms of dividends and repayment during liquidation.

Corporate Veil Theory and Its Exceptions

  • The corporate veil protects members from the liabilities of the company’s actions.
  • Lifting the corporate veil allows courts to evaluate the true nature of a business arrangement, especially in cases of fraud or avoidance of legal responsibilities.
  • Key cases underpinning this theory include Salomon vs. Salomon, where the veil was upheld, and Dinshaw Maneckjee Petit, where it was pierced.

Deep Dive

  • Exceptions to the corporate veil concept stem from public policy considerations, especially in tax evasion cases.
  • Lifting may occur when recognizing joint ventures or when a company acts as a façade for the management.

Doctrines of Constructive Notice and Indoor Management

  • Constructive notice refers to the presumption that third parties are aware of a company’s MOA and AOA.
  • The doctrine of indoor management protects outsiders dealing with a company from internal procedural irregularities.
  • The Turquand Rule is a fundamental exception to the constructive notice doctrine, emphasizing external parties’ rights.

Deep Dive

  • Exceptions to the indoor management doctrine include fraud, irregularities known or suspected by the third party, and situations involving forgery.
  • Cases like Royal British Bank v. Turquand illustrate the balance between safeguarding companies and protecting third parties.

Summary

The Companies Act, 2013 serves to regulate corporate structure and governance in India, clearly distinguishing the legal identity of companies from their members while outlining the obligations of businesses. Key concepts such as corporate veil, company registration, types of shares, and doctrines governing contractual relations all play critical roles in establishing corporate responsibility and facilitating business operations. This Act underscores the importance of transparency and compliance for maintaining the integrity of business practices, which, if neglected, may lead to legal accountability for promoters and directors.