Kinds of Companies9th July 2020
Before the enactment of the Companies Act, a company would be formed by means of Royal Charter or Proclamation. That is, the promoters had to apply to the King through the parliament for necessary sanction and approval of the company. As such, these companies were called Chartered Companies and they were to use the word ‘Chartered’, e.g., the East India Company, the Bank of England etc.
The companies which are registered and formed under the Companies Act, 1956, or were registered under any of the earlier Companies Act are called Registered Company. These are commonly found companies.
They were of three types:
(i) Company Limited by Shares [Sec. 12(2)(a)]
In these companies, the liability of the shareholders is limited up to the extent of the face value of shares owned by each of them, i.e., the member is not liable to pay anything more than the fixed value of the shares, whatever may be the liability of the company.
It is interesting to note that the liability can be maintained either during the existence of the company or during the period of winding-up. Needless to mention, if the shares are fully paid, the liability of the shareholders are nil with the exception to the rule as laid down in Sec. 45. The type of company may be a Private Company or a Public Company.
(ii) Company Limited by Guarantee [Sec. 12(2)(b)]
In these companies, the liability of the shareholders is limited to a specified amount as provided in the memorandum, i.e., each member provides to pay a fixed sum of money in the event of liquidation of the company.
It has a legal entity distinct from its members. The liability of its members is limited. According to Sec. 27(2), the Article of Association of the company must express the number of members by which the company is actually registered.
It is interesting to note that these types of companies are not formed for the purpose of earning revenue/profit but for the purpose of promoting arts, sciences, commerce, culture, sports etc., and, as such, they may or may not have any share capital. So, the amount which has been guaranteed by the members is like reserve capital.
If the company has a share capital, it must conform to Table D in Schedule I, and, if it has no share capital, it must conform to Table C in Schedule I. It is also mentioned here that if it has a share capital, it is governed by the same provisions as governed by the company limited by shares. It cannot purchase its own shares [Sec. 77(1)]. This type of company may be a Private Company or a Public Company.
According to Sec. 426, if the company limited by guarantee is being wound-up, every member is liable to contribute to the assets of the company for:
- Payment of the liabilities
- Cost, charges and expenses of winding-up
- For adjustment of rights of the contributories among themselves
(iii) Unlimited Company [Sec. 12(2)(c)]
In these companies, every shareholder is liable for all the liabilities of the company like ordinary partnership in proportion to his interest. According to Sec. 12, any seven or more persons (two or more in case of private company) may form a company with or without limited liability and a company without limited liability is actually known as unlimited company. It may or may not have any share capital. It will be a private or a public company if it has a share capital. Its Articles of Association will provide the number of members by which the company is registered.
These companies are created by the Special Act of the legislature, e.g., the State Bank of India, the Life Insurance Corporation of India, the Reserve Bank of India, etc. These are actually concerned with public utility services, e.g., railways, gas and electric companies, etc. which require special powers to function.
According to Sec. 3(1)(iii) of the Indian Companies Act, 1956, a private company is one which, by its Articles:
(i) Restricts the rights to transfer its shares, if any;
(ii) Limits the number of the members to fifty not including
- Persons who are in the employment of the company
- Persons who, having been formerly in the employment of the company, were members of the company while in that employment, and have continued to be members after the employment ceases
(iii) Prohibits any invitation to the public to subscribe for any shares in or debentures of, the company.
A private company must have its own Articles of Association which will contain the provisions laid down in Sec. 3(1)(iii).
This type of company is in the nature of partnership with mutual confidence among them.
Sec. 3(1)(iv) of the Indian Companies Act, 1956, states that public companies are “all companies other than private companies.” It is a company of seven or more persons which offers its shares to the public for subscription. Since its shares are offered to the public, scope for investment by a large number of- people is possible.
The companies which are incorporated outside India but which had a place of business in India prior to commencement of the new Companies Act, 1956, and continue to have the same or which establishes’ a place of business in India after the commencement of the Companies Act, 1956, is called a foreign company. These companies are registered in a country outside India and under the law of that country.
At present Sec. 591(2) added by the Companies (Amendment) Act, 1974, informs that where not less than 50% of the paid-up share capital (whether equity or preference or partly equity or partly preference) of a foreign company, (i.e., a company incorporated outside India having an established place of business in India) is held by one or more citizens of India and/or by one or more Indian companies, singly or jointly, such company shall comply with such provisions as may be prescribed as if it was an Indian company.
If a company has an established place of business in India and if it has a specified or identified place where it carries on business, e.g., an office, store-house, godown or other premises.
According to Sec. 617, a Government company is a company in which not less than 51% of the paid-up share capital is held by the Central Government and/or any State Government or partly by Central and partly by State Governments. The subsidiary of a Government company is also a Government company.
Holding and Subsidiary Company
According to the Companies Act, 1956, a holding company may be defined as “any company which directly or indirectly, through the medium of another company, holds more than half of the equity share capital of other companies or controls the composition of the board of directors of other companies. Moreover, a company becomes a subsidiary of another company in those cases where the preference shareholders of the latter company are allowed more than half of the voting power of the company from a date before the commencement of this Act”.
In other words, a holding company is one which controls one or more other companies—either by means of holding shares in that company or companies or by having powers to appoint directly or indirectly the whole or majority of the Board of Directors of those companies.
A company controlled by a holding company is known as a subsidiary company. Actually, it is a part and parcel of the combination movement in business.