Understanding Corporate Law: Formation, Governance & Types of Companies in India

Introduction

Corporate law, also known as company law, serves as the guiding force behind the establishment, operation, and governance of businesses. In India, it lays the foundation for the interaction between corporations, investors, employees, creditors, and other stakeholders. This article delves into the concept of corporate law in the Indian context, exploring its historical development, key features, and the types of companies it governs.

Corporate law serves as the intricate framework dictating the intricate interplay among corporations, investors, shareholders, directors, employees, creditors, and an array of other stakeholders, encompassing customers, the community, and the environment. While the terms “company law” and “business law” are often used interchangeably, the former primarily delves into the broader realm of commercial law, encompassing legal principles governing various commercial and business-related endeavors. This may encompass aspects of corporate governance and financial law, further shaping the landscape. In essence, company law constitutes a compendium of diverse legal facets that regulate the establishment, operation, and dissolution of a corporate entity.

Within the context of India, the Indian companies act of 2013 supersedes its predecessor, the Companies Act of 1956, thereby governing the functioning of corporations formed under Section 2(20) of the Act.

History

Derived from English corporate law in 1844, the concept of the Companies Act served as the foundation for company legislation in India. The first instance of company legislation in India was introduced in 1850, known as the Joint Stock Companies Act. However, this Act was subsequently replaced by the Joint Stock Companies Act of 1857, which further shaped the regulatory framework for companies in India.

Characteristics

Corporate law exhibits several distinctive characteristics that shape its functioning and impact on businesses. Some key characteristics are as follows:

• Incorporated Association: A fundamental requirement of company law is that a company must be registered under the Companies Act of the respective jurisdiction. Only associations of individuals that have completed the registration and incorporation process with the Registrar of Companies are recognized as legitimate companies.
• Separate Legal Entity: Companies incorporated under the Companies Act are regarded as separate legal entities, distinct from their individual members. This legal principle grants the company its own rights, obligations, and liabilities, ensuring that the actions and liabilities of the company are separate from those of its shareholders or directors.
• Limited Liability: One of the noteworthy advantages of forming a company is the concept of limited liability. Due to its separate legal entity status, the liability of company members is typically limited to the unpaid value of their shares. In certain cases, such as companies limited by guarantee, the liability of members may be determined by the amount specified in their guarantee.
• Perpetual Existence: A unique aspect of a company is its perpetual existence. Unlike natural persons, a company does not have a limited lifespan. Even in the event of changes such as the death, insolvency, insanity, or retirement of its members, the status and existence of the company remain unaffected. This perpetual nature of a company allows for long-term business planning, continuity, and stability.

These characteristics contribute to the distinctive nature of company law, providing legal structure, protection, and flexibility for businesses to operate and flourish.

Kinds of companies

On the basis of liability

Companies can be categorized into different types based on various factors. One such factor is the liability of its members. The following are two common types of companies based on liability:

1. Companies Limited by Shares: In this type of company, the liability of its members is limited to the extent of the nominal value of the shares they hold. If a shareholder has fully paid for their shares, they are not personally liable for the debts of the company. Their obligation is limited only to the amount invested in the shares. Creditors of the company cannot demand payment from the shareholders’ personal assets. Companies limited by shares are prevalent in many jurisdictions, including India, and are a popular choice for business ventures.
2. Unlimited Companies: Unlike companies limited by shares, unlimited companies do not impose a constraint on the liability of their shareholders. In such companies, if the company’s assets are insufficient to cover its debts, creditors can seek payment from the personal property and funds of the shareholders. The shareholders bear the risk of unlimited liability for the debts and obligations of the company. However, it is important to note that unlimited companies are not commonly found in India, although they are recognized by Section 2(20) of the Companies Act.

On the basis of number

• Public Company: A public company is a company which is:

• • Is not a private company
  • Is a company which is not an ancillary of any of the private company
• Private Company: A private company is an company, which by its articles :
  • Cannot transfer shares freely
  • It must have at least 2 member but not exceeding 200
• One Person Company or OPC: According to Sec.2 (62) of the Companies Act, 2013, company which has only 1 person as a shareholder :
  • Only a natural person who is an Indian citizen and an Indian resident can form 1 person company.
  • It does not execute non-banking financial investment pursuits.
  • It has paid-up share capital which is not more than ₹ 50 Lakhs.
  • Its aggregate annual turnover of 3 years does not cross ₹ 2 Crores.

Other types of companies

In addition to the types of companies based on liability, there are several other types of companies recognized under company law. These include:

1. Government Companies: Government companies are those in which more than 50% of the share capital is held by the central government, state governments, or jointly by both. These companies are established to carry out specific government functions or provide essential public services. They operate under the regulations and oversight of the government.
2. Foreign Companies: Foreign companies are entities that are incorporated and registered outside of India but engage in business activities within India. These companies may establish a presence in India either through their own operations or through collaborations with Indian companies. They are subject to specific regulations and requirements to conduct business within the country.
3. Section 8 Companies: Section 8 companies, also known as nonprofit organizations (NPOs), are formed for promoting charitable, scientific, social, or similar objectives. These companies are registered under Section 8 of the Companies Act, 2013. Section 8 companies do not distribute dividends to shareholders, and any profits generated are reinvested in the company to further its charitable goals.
4. Dormant Companies: Dormant companies are entities that are registered under the Companies Act but remain inactive without any significant accounting transactions. These companies are usually formed for future projects, to hold assets or intellectual property, or for other strategic purposes. Dormant companies are not required to comply with all the regulatory obligations that apply to active companies, providing flexibility for future endeavors.

Significant accounting transaction mentioned above are:

1. Payment of fees by a company to registrar

2. Payment for maintenance of its office and records

3. Payments made by company to fulfill the requirements of this act or any other law

4. Allotment of shares to fulfill the requirements of this act

Corporate Governance

Corporate governance is system for direction and control of companies and organizations.    Corporate governance consists of rules and regulations for day-to-day smooth management of the company by superior level authoritites such as board of directors.

Four principles for good corporate governance are

• Accountability
• Transparency
• Fairness
• Responsibility

Conclusion 

Corporate law plays a pivotal role in shaping the business landscape in India. It provides a legal framework that ensures the smooth functioning of companies while also protecting the interests of all stakeholders involved. From the formation of a company to its governance, corporate law outlines the path to be followed. By understanding and complying with these laws, businesses can effectively navigate their journey towards growth and success.