KCC TUTORIALS Basic Concepts

BASIC CONCEPTS

Administrative Authorities
MCA – Ministry of Corporate Affairs – To frame rules and to look after the working
of RDs and ROCs
RD – Regional Directors – To look after the working of ROCs and Official Liquidators
ROC – Registrar of Companies – To look after all filing process and registration of
companies etc.

(By Jagdeep Arora ([Link], CA, CS & CMA)

Appellate Authorities
NCLT – National Company Law Tribunal
NCLAT – National Company Law Appellate Tribunal
Special Court – set by CG to run Trials under the Companies Act

Companies Act, 2013

Number of Sections 470
Number of Schedules 7
Number of Chapters 29
Applicability 1.4.2014
Rules The Companies Act, 2013 is rule based Legislation.
Majority part of the company law contained in Rules to
provide flexibility for amendments by avoiding rigid
parliamentary procedures
Website [Link]

Company Law
• Companies Act, 2013
• Rules
• Regulations
• Notifications

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• Circulars
• Case Laws

Companies Act, 2013

Companies Act, 2013 is an Act to consolidate and amend the law relating to
companies.
Meaning of Company
Generally Company means an association of persons who come together for a common
purpose.
The word ‘company’ is derived from the Latin word (Com=with or together; panis =bread),
and it originally referred to an association of persons who took their meals together. In
the leisurely past, merchants took advantage of festive gatherings, to discuss business
matters. Nowadays, the company form of organization has assumed great importance.

(By Jagdeep Arora ([Link], CA, CS & CMA)

In popular parlance, a company denotes an association of likeminded persons formed for
the purpose of carrying on some business or undertaking. A company is a corporate body
and a legal person having status and personality distinct and separate from the members
constituting it.

Definition of “Company” (Section 2(20)

As per Section 2(20) of Companies Act, 2013 , company means a company
incorporated under this Act or under any previous company law.

Note: It means under the companies Act, 2013, only those companies are considered
which have been registered under the Indian Companies Acts i.e Companies Act, 2013 or
any previous company law.

Basic characteristics of COMPANY:

a) Incorporated/Registered association: A company is formed and registered by
complying with the prescribed formalities under Companies Act. It means company
does not come into existence without being registered.
b) Separate legal entity: A company is an artificial person in the eyes of law and it is
distinct from its members.
c) Separate property: A company can hold its property in its own name. Members are
not owners of the company’s property.
d) Capacity to sue and be sued: A company can sue and be sued in its own name.
e) Transferability of shares The shares of the public company are freely transferable
but shares of private company are transferable subject to restrictions.
f) Perpetual succession:‘ Members may come and go, but the company goes on forever’.
Death, insolvency etc. of member does not affect the continuity of the company. Thus

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the life of the company does not depend upon the life of its members. A company
never dies.
g) Common seal: Common seal is the official signature of the company. But under
Companies Act, 2013 use of common seal has been made optional
h) Limited liability: In case of a company limited by shares, the liability of a member is
limited to the extent of amount unpaid on the shares held by him.
In case of company limited by guarantee, liability of a member is limited to the extent
of amount taken as guarantee to be paid by him in the event of Winding up.

Disadvantages of “company form of organization”

a) Excessive legal formalities in incorporation & winding up.
b) Excessive monetary expenditure in incorporation & winding up.
c) Higher taxability.
d) Monetary expenditure in ROC filings.

(By Jagdeep Arora ([Link], CA, CS & CMA)

e) Social responsibility. For example certain companies have been mandated to spend certain
part of its income on corporate social responsibilities u/s 135.
f) Too much transparency. Anyone can get the copy of financial records of the company from
the ROC.

Whether a Company is a citizen of India or not ?

A company is not a citizen of India, as held by Supreme Court, in decided cases-

√ SC held that though a company is an artificial person in the eyes of law, but it is not the
citizen of India- neither as per Constitution of India, nor as per Citizenship Act, 1955.
√ Even if all members of company are citizens of India, still the company cannot be
considered as citizen of India. As Citizenship under Citizenship Act, 1955 is available
only to individuals. Therefore, no company can be a citizen of India.

Q. Whether a natural and Non-natural persons both can become members in a company?
Ans. Statement is true except in case of One person company. In a company natural
person i.e Individual or Non-natural persons i.e company, LLP etc. can become members
but in case of One Person Company only Natural Person can become member.

Note: OPC can become a member in a company but in OPC other than individual cannot
become a member.

Q. A company being an artificial person having status in the eyes of law,” in light to this
statement, please comment whether a Company incorporated in India is having the status
of a Citizen of this Country. “ (June, 17(F) – 4 marks)
Hint: No

Company

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Having Domicile Yes, it decides the place of company

Having citizenship No

Short Title, Extent, Commencement and Applicability of Act (Section 1)

(1) This Act may be called the Companies Act, 2013.
(2) It extends to the whole of India.
(3) This section shall come into force at once and the remaining provisions of this Act
shall come into force on such date as the Central Government may, by notification in the
Official Gazette, appoint and different dates may be appointed for different provisions
of this Act and any reference in any provision to the commencement of this Act shall be
construed as a reference to the coming into force of that provision.
Enforcement of Companies Act, 2013

(By Jagdeep Arora ([Link], CA, CS & CMA)

Section 1 came into force on 30th August, 2013; 98 sections came into force on 12th
September, 2013; 143 sections were enforced from 1st April, 2014 and so on.

(4) The provisions of this Act shall apply to—

(a) companies incorporated under this Act or under any previous company law;
(b) insurance companies, except in so far as the said provisions are inconsistent with
the provisions of the Insurance Act, 1938 or the Insurance Regulatory and
Development Authority Act, 1999;
(c) banking companies, except in so far as the said provisions are inconsistent with the
provisions of the Banking Regulation Act, 1949;
(d) companies engaged in the generation or supply of electricity, except in so far as the
said provisions are inconsistent with the provisions of the Electricity Act, 2003;
(e) any other company governed by any special Act for the time being in force, except
in so far as the said provisions are inconsistent with the provisions of such special
Act; and
(f) such body corporate, incorporated by any Act for the time being in force, as the
Central Government may, by notification, specify in this behalf, subject to such
exceptions, modifications or adaptation, as may be specified in the notification.
Example: FCI , NHAI

Concept of Body Corporate {section 2(11)}

Body Corporate or Corporation includes a company incorporated outside India, but does not
include -
(i) a co-operative society registered under any law relating to co-operative societies; and

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(ii) any other body corporate (not being a company as defined in this Act), which the
Central Government may, by notification, specify in this behalf;

Whether a Company is Body Corporate?

Section 9 - From the date of incorporation mentioned in the certificate of incorporation, such
subscribers to the memorandum and all other persons, as may, from time to time, become
members of the company, shall be a body corporate by the name contained in the
memorandum, capable of exercising all the functions of an incorporated company under this
Act and having
• perpetual succession and
• a common seal (optional)
• with power to acquire, hold and dispose of property, both movable and immovable,
tangible and intangible,
• to contract and to sue and be sued, by the said name.

(By Jagdeep Arora ([Link], CA, CS & CMA)

Analysis

Body Corporate = A separate Legal Entity

A company registered in Company Body Corporate u/s 9
India
A company registered o/s Neither a company u/s Body Corporate u/s 2(11)
India but not having any 2(20) nor a foreign
place of business in India company
A company registered o/s Foreign Company Body Corporate u/s 2(11)
Indian and having a place
of business in India
LLP A Body Corporate
A proprietorship concern No
Partnership under No
Partnership Act, 1932
A co-operative society No

Q. Each company is body corporate but every body corporate is not a company.
Comment.
Ans. Yes, under section 9 every company registered under Companies Act, 2013 or
any previous company law is a body corporate. And as per section 2(20) even a
company registered outside India is a body corporate. But every body corporate is
not a company e.g Limited liability partnership.

Public Financial Institution – Section 2(72)

"Public financial institution" means—

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(i) the Life Insurance Corporation of India, established under section 3 of the Life
Insurance Corporation Act, 1956;
(ii) the Infrastructure Development Finance Company Limited, referred to in clause (vi)
of sub-section (1) of section 4A of the Companies Act, 1956 so repealed under
section 465 of this Act;
(iii) specified company referred to in the Unit Trust of India (Transfer of Undertaking
and Repeal) Act, 2002;
(iv) institutions notified by the Central Government under sub-section (2) of section 4A
of the Companies Act, 1956 so repealed under section 465 of this Act;
(v) such other institution as may be notified by the Central Government in consultation
with the Reserve Bank of India:
Provided that no institution shall be so notified unless—
(A) it has been established or constituted by or under any Central or State Act other

(By Jagdeep Arora ([Link], CA, CS & CMA)

than this Act or previous company law; or
(B) not less than 51% of the paid-up share capital is held or controlled by the Central
Government or by any State Government or Governments or partly by the Central
Government and partly by one or more State Governments;

Concept of Corporate Veil

Introduction- Separate legal identity (Artificial Personality) of the company acts as a
“Corporate Veil” which separate BOD and the members from the outside world. Though
all the benefits accruing to the company are enjoyed by its members and directors, but
if the company commits any breach of contract then the suit is faced by the company in
its own name, not by the shareholders and directors in their own name.

LIFTING OF CORPORATE VEIL (Alter-ego)

Under judiciary provisions-

a) Protection of revenue- An individual incorporated various companies with the

intention of tax evasion to divide his one income into many small incomes. COURT held
that- veil can be lifted to treat all such small incomes of company and the tax can be
imposed accordingly.
b) Prevention of fraud or improper conduct- A public company appointed an individual as
its managing director (MD) on the undertaking that he will not misuse the internal
information of the company received by him after his appointment in the company,
and, he will not start any new business similar to the business of public company,
neither his tenure as MD and up to 5 years after his retirement. BUT, after his
retirement, he incorporated a new company and started a new business similar to the
business of public company. And, such new company started snatching away the
business associates of public company.

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A company objected that he himself was not doing rival business as promised by him in
the undertaking, and rather the rival business was being done by such newly incorporated
company.

COURT held that- if new company is incorporated with the intention of committing the
fraud the veil can be lifted and the suitable order may be passed against an individual
committing the fraud. COURT held that- an individual and his company shall be treated
as one single person. Court passed Cease and Desist order against an individual and his
company.

c) Determining the character of the company- whether enemy company- Holding

company was in Germany. Its subsidiary company was in Britain. Subsequently,
Germany declared war on England. Britain subsidiary company filed the suit against

(By Jagdeep Arora ([Link], CA, CS & CMA)

its customers in Britain to realize the proceeds of credit sales made to them. Court
denied the recovery of sales proceeds by the British subsidiary company, on the
grounds that its shareholders were from Germany and the revenue earned by British
company will be ultimately sent to them who were in fact of enemy character.

Court Held That- Veil can be lifted to ascertain the enemy character of the company.
Since the company is an artificial person, it can neither be an enemy nor be a friend,
therefore, the veil is lifted to check whether the character of directors and
shareholders inside the company is friendly or enemy towards the COUNTRY.
Under Statutory Provisions

Untrue statement in prospectus - Section 34:- Where a prospectus, issued, circulated

or distributed under this Chapter, includes any statement which is untrue or misleading
in form or context in which it is included or where any inclusion or omission of any matter
is likely to mislead, every person who authorizes the issue of such prospectus shall be
liable under section 447.

Doctrine of Alter ego (Lifting of Corporate Veil)

It is used by the courts to ignore the status of shareholders, officers, and directors of
a company in reference to their liability in their respective capacity so that they may
be held personally liable for their actions when they have acted fraudulently or unjustly.
In Lennards Carying Co. Ltd. v. Asiatic Petroleum Co. Ltd. [1915] AC 705, Viscount
Haldane propounded the “alter ego” theory and distinguished it from vicarious liability.
The House of Lords stated that the default of the managing director who is the
“directing mind and will” of the company, would be attributed to him and he be held for
the wrong doing of the company.

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Common Seal
Companies (Amendment) Act, 2015, has diluted the mandatory adoption of common seal.
The Company may or may not adopt a common seal. The company may contract under its
common seal, if any and in case, the company does not have a common seal then according
to the requirements of that particular section the contract shall be validated.

Effects on the provisions of Company Law

As per section 12(3)(a) , Every company shall have its name engraved in legible characters
on its seal, if any.

Execution of bills of exchange etc. – Section 22

(1) A company may, by writing under its common seal, if any, authorise any person, either
generally or in respect of any specified matters, as its attorney to execute other deeds
on its behalf in any place either in or outside India.

(By Jagdeep Arora ([Link], CA, CS & CMA)

“Provided that in case a company does not have a common seal, the authorisation under
this sub-section shall be made by two directors or by a director and the Company
Secretary, wherever the company has appointed a Company Secretary.”;

(2)A deed signed by such an attorney on behalf of the company and under his seal
shall bind the company.
Section – 46
(1) Common Seal or Signing of Share Certificate - A Certificate, “issued under the
common seal, if any, of the company or signed by two directors or by a director and
the Company Secretary, wherever the company has appointed a Company Secretary,
specifying the shares held by any person, shall be prima facie evidence of the title
of the person to such shares.
Q. A body corporate is not a living person who can sign. In such a situation, state the
manner in which a company can sign on important documents. What shall be your
advice to the company on the official signatures while entering into contracts with
third parties ? (Dec, 14 – 4 marks)

Definition of “Relative” – Section 2(77) read with Rule 4

"Relative", with reference to any person, means any one who is related to another, if—
(i) they are members of a Hindu Undivided Family;
(ii) they are husband and wife; or
(iii) one person is related to the other in such manner as may be prescribed;
Rule 4 - List of relatives in terms of clause (77) of section 2.- A person shall be
deemed to be the relative of another, if he or she is related to another in the
following manner, namely:-
1) Father:

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Provided that the term “Father” includes step-father.

2) Mother:
Provided that the term “Mother” includes the step-mother.
3) Son:
Provided that the term “Son” includes the step-son.
4) Son’s wife.
Daughter including the step-daughter.
5) Daughter’s husband.
6) Brother:
Provided that the term “Brother” includes the step-brother;
7) Sister:
Provided that the term “Sister” includes the step-sister.

(By Jagdeep Arora ([Link], CA, CS & CMA)

Definition of Financial Year – Section 2(41)
"Financial year", in relation to any company or body corporate, means the period ending
on the 31st day of March every year, and where it has been incorporated on or after the
1st day of January of a year, the period ending on the 31st day of March of the following
year, in respect whereof financial statement of the company or body corporate is made
up:
Provided that where a company or body corporate, which is a holding company or a
subsidiary or associate company of a company incorporated outside India and is required
to follow a different financial year for consolidation of its accounts outside India, the
Central Government (Regional Director) may, on an application made by that company or
body corporate in such form and manner as may be prescribed, allow any period as its
financial year, whether or not that period is a year.
Provided further that any application pending before the Tribunal as on the date of
commencement of the Companies (Amendment) Ordinance, 2018, shall be disposed of by
the Tribunal in accordance with the provisions applicable to it before such
commencement.

Provided also that a company or body corporate, existing on the commencement of this
Act, shall, within a period of two years from such commencement, align its financial year
as per the provisions of this clause;

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Q. Star Ltd. was incorporated on 1st January, 2016. Further, Star Ltd. has floated its
subsidiary company incorporated in Germany for which the financial year ends with
June every year. In light to the above, please determine:

(i) The first financial year of Star Ltd. for which financial statement will be reported.
(ii) Does Star Ltd. have an option to align its financial year with that of its German
subsidiary in respect to the consolidation of its accounts outside India.

Free Reserves – Section 2(43)

"Free reserves" means such reserves which, as per the latest audited balance sheet of a
company, are available for distribution as dividend:
Provided that—

(By Jagdeep Arora ([Link], CA, CS & CMA)

(i) any amount representing unrealised gains, notional gains or revaluation of assets,
whether shown as a reserve or otherwise, or
(ii) any change in carrying amount of an asset or of a liability recognized in equity,
including surplus in profit and loss account on measurement of the asset or the
liability at fair value,
shall not be treated as free reserves;

Net Worth – Section 2(57)

"Net worth" means the aggregate value of the paid-up share capital and all reserves
created out of the profits and securities premium account and debit or credit balance
of profit and loss account, after deducting the aggregate value of the accumulated
losses, deferred expenditure and miscellaneous expenditure not written off, as per the
audited balance sheet, but does not include reserves created out of revaluation of assets,
write-back of depreciation and amalgamation;

Net Worth
Paid up share capital xxxx
Reserves excluding reserves created out of xxxx
revaluation of assets,
Securities Premium xxxx
Balance in Profit & Loss account xxxx
Less:
- Accumulated Losses (xxxx)
- Deferred Expenditure (xxxx)
- Miscellaneous expenditure (xxxx)

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Prescribed – Section 2(66)

"Prescribed" means prescribed by rules made under this Act;

(By Jagdeep Arora ([Link], CA, CS & CMA)

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Control – Section 2(7)

"Control" shall include the right to appoint majority of the directors or to control the
management or policy decisions exercisable by a person or persons acting individually or
in concert, directly or indirectly, including by virtue of their shareholding or management
rights or shareholders agreements or voting agreements or in any other manner;
Control
 Right to appoint majority of the directors or
 Right to control the management or policy decisions exercisable
by a person or persons acting individually or in concert, directly or indirectly,
including by virtue of
- their shareholding or
- management rights or

(By Jagdeep Arora ([Link], CA, CS & CMA)

- shareholders agreements or
- voting agreements or
- in any other manner;

Punishment for Fraud – Section 447

Without prejudice to any liability including repayment of any debt under this Act or any
other law for the time being in force, any person who is found to be guilty of fraud
involving an amount of at least ₹ 10 lacs or 1% of the turnover of the company, whichever
is lower, shall be punishable with imprisonment for a term which shall not be less than 6
months but which may extend to 10 years and shall also be liable to fine which shall not
be less than the amount involved in the fraud, but which may extend to three times the
amount involved in the fraud:
Provided that where the fraud in question involves public interest, the term of
imprisonment shall not be less than three years.
Provided further that where the fraud involves an amount less than ₹ 10 lacs or 1% of
the turnover of the company, whichever is lower, and does not involve public interest, any
person guilty of such fraud shall be punishable with imprisonment for a term which may
extend to 5 years or with fine which may extend to ₹ 50 lacs or with both

Explanation.—For the purposes of this section—

(i) "fraud" in relation to affairs of a company or any body corporate, includes any act,
omission, concealment of any fact or abuse of position committed by any person or
any other person with the connivance in any manner, with intent to deceive, to gain
undue advantage from, or to injure the interests of, the company or its
shareholders or its creditors or any other person, whether or not there is any
wrongful gain or wrongful loss;

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(ii) "wrongful gain" means the gain by unlawful means of property to which the person
gaining is not legally entitled;
(iii) "wrongful loss" means the loss by unlawful means of property to which the person
losing is legally entitled.

(By Jagdeep Arora ([Link], CA, CS & CMA)

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