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Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

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Assignment is a legal term whereby an individual, the “assignor,” transfers rights, property, or other benefits to another known as the “ assignee .”   This concept is used in both contract and property law.  The term can refer to either the act of transfer or the rights /property/benefits being transferred.

Contract Law   

Under contract law, assignment of a contract is both: (1) an assignment of rights; and (2) a delegation of duties , in the absence of evidence otherwise.  For example, if A contracts with B to teach B guitar for $50, A can assign this contract to C.  That is, this assignment is both: (1) an assignment of A’s rights under the contract to the $50; and (2) a delegation of A’s duty to teach guitar to C.  In this example, A is both the “assignor” and the “delegee” who d elegates the duties to another (C), C is known as the “ obligor ” who must perform the obligations to the assignee , and B is the “ assignee ” who is owed duties and is liable to the “ obligor ”.

(1) Assignment of Rights/Duties Under Contract Law

There are a few notable rules regarding assignments under contract law.  First, if an individual has not yet secured the contract to perform duties to another, he/she cannot assign his/her future right to an assignee .  That is, if A has not yet contracted with B to teach B guitar, A cannot assign his/her rights to C.  Second, rights cannot be assigned when they materially change the obligor ’s duty and rights.  Third, the obligor can sue the assignee directly if the assignee does not pay him/her.  Following the previous example, this means that C ( obligor ) can sue B ( assignee ) if C teaches guitar to B, but B does not pay C $50 in return.

            (2) Delegation of Duties

If the promised performance requires a rare genius or skill, then the delegee cannot delegate it to the obligor.  It can only be delegated if the promised performance is more commonplace.  Further, an obligee can sue if the assignee does not perform.  However, the delegee is secondarily liable unless there has been an express release of the delegee.  That is, if B does want C to teach guitar but C refuses to, then B can sue C.  If C still refuses to perform, then B can compel A to fulfill the duties under secondary liability.

Lastly, a related concept is novation , which is when a new obligor substitutes and releases an old obligor.  If novation occurs, then the original obligor’s duties are wiped out. However, novation requires an original obligee’s consent .  

Property Law

Under property law, assignment typically arises in landlord-tenant situations.  For example, A might be renting from landlord B but wants to another party (C) to take over the property.   In this scenario, A might be able to choose between assigning and subleasing the property to C.  If assigning , A would be giving C the entire balance of the term, with no reversion to anyone whereas if subleasing , A would be giving C for a limited period of the remaining term.  Significantly, under assignment C would have privity of estate with the landlord while under a sublease, C would not. 

[Last updated in May of 2020 by the Wex Definitions Team ]

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What is an Assignment?

In the world of business and contracts, the term assign holds significant importance. It refers to the transfer of rights or interests from one party to another. Specifically, in the context of a lease agreement, an assignment occurs when a lessee transfers all of their rights and interests in the leased property to another person or entity. It is crucial to note that an assignment is different from a sublease, as a sublease only transfers a portion of the lessee’s rights.

Examples of Assignments

To better understand the concept of assignment, let’s consider a few examples. Imagine you are a business owner who has leased a commercial space for your retail store. However, due to unforeseen circumstances, you decide to sell your business. In this scenario, you have the option to assign your lease to the new owner of the business. By doing so, you transfer all of your rights and obligations under the lease to the new owner, allowing them to continue operating in the same space.

Another example could be a software development company that has entered into a contract with a client to develop a custom software solution. If the company is unable to fulfill the contract due to resource constraints, they may choose to assign the contract to another software development firm. This assignment would transfer all rights and obligations of the original contract to the new firm, ensuring the client’s needs are still met.

The Importance of Assignments

Assignments play a crucial role in business transactions and contractual agreements. They provide flexibility and allow parties to transfer their rights and obligations to others, ensuring continuity and efficiency. By assigning a lease or contract, businesses can adapt to changing circumstances without facing penalties or breaching agreements.

For the assignee, or the party receiving the assignment, it offers an opportunity to step into an existing agreement without the need to negotiate a new contract. This can save time, effort, and resources, especially in situations where time is of the essence.

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What Is a Business Plan?

Understanding business plans, how to write a business plan, common elements of a business plan, the bottom line, business plan: what it is, what's included, and how to write one.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

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A business plan is a document that outlines a company's goals and the strategies to achieve them. It's valuable for both startups and established companies. For startups, a well-crafted business plan is crucial for attracting potential lenders and investors. Established businesses use business plans to stay on track and aligned with their growth objectives. This article will explain the key components of an effective business plan and guidance on how to write one.

Key Takeaways

• A business plan is a document detailing a company's business activities and strategies for achieving its goals.
• Startup companies use business plans to launch their venture and to attract outside investors.
• For established companies, a business plan helps keep the executive team focused on short- and long-term objectives.
• There's no single required format for a business plan, but certain key elements are essential for most companies.

Investopedia / Ryan Oakley

Any new business should have a business plan in place before beginning operations. Banks and venture capital firms often want to see a business plan before considering making a loan or providing capital to new businesses.

Even if a company doesn't need additional funding, having a business plan helps it stay focused on its goals. Research from the University of Oregon shows that businesses with a plan are significantly more likely to secure funding than those without one. Moreover, companies with a business plan grow 30% faster than those that don't plan. According to a Harvard Business Review article, entrepreneurs who write formal plans are 16% more likely to achieve viability than those who don't.

A business plan should ideally be reviewed and updated periodically to reflect achieved goals or changes in direction. An established business moving in a new direction might even create an entirely new plan.

There are numerous benefits to creating (and sticking to) a well-conceived business plan. It allows for careful consideration of ideas before significant investment, highlights potential obstacles to success, and provides a tool for seeking objective feedback from trusted outsiders. A business plan may also help ensure that a company’s executive team remains aligned on strategic action items and priorities.

While business plans vary widely, even among competitors in the same industry, they often share basic elements detailed below.

A well-crafted business plan is essential for attracting investors and guiding a company's strategic growth. It should address market needs and investor requirements and provide clear financial projections.

While there are any number of templates that you can use to write a business plan, it's best to try to avoid producing a generic-looking one. Let your plan reflect the unique personality of your business.

Many business plans use some combination of the sections below, with varying levels of detail, depending on the company.

The length of a business plan can vary greatly from business to business. Regardless, gathering the basic information into a 15- to 25-page document is best. Any additional crucial elements, such as patent applications, can be referenced in the main document and included as appendices.

Common elements in many business plans include:

• Executive summary : This section introduces the company and includes its mission statement along with relevant information about the company's leadership, employees, operations, and locations.
• Products and services : Describe the products and services the company offers or plans to introduce. Include details on pricing, product lifespan, and unique consumer benefits. Mention production and manufacturing processes, relevant patents , proprietary technology , and research and development (R&D) information.
• Market analysis : Explain the current state of the industry and the competition. Detail where the company fits in, the types of customers it plans to target, and how it plans to capture market share from competitors.
• Marketing strategy : Outline the company's plans to attract and retain customers, including anticipated advertising and marketing campaigns. Describe the distribution channels that will be used to deliver products or services to consumers.
• Financial plans and projections : Established businesses should include financial statements, balance sheets, and other relevant financial information. New businesses should provide financial targets and estimates for the first few years. This section may also include any funding requests.

Investors want to see a clear exit strategy, expected returns, and a timeline for cashing out. It's likely a good idea to provide five-year profitability forecasts and realistic financial estimates.

2 Types of Business Plans

Business plans can vary in format, often categorized into traditional and lean startup plans. According to the U.S. Small Business Administration (SBA) , the traditional business plan is the more common of the two.

• Traditional business plans : These are detailed and lengthy, requiring more effort to create but offering comprehensive information that can be persuasive to potential investors.
• Lean startup business plans : These are concise, sometimes just one page, and focus on key elements. While they save time, companies should be ready to provide additional details if requested by investors or lenders.

Why Do Business Plans Fail?

A business plan isn't a surefire recipe for success. The plan may have been unrealistic in its assumptions and projections. Markets and the economy might change in ways that couldn't have been foreseen. A competitor might introduce a revolutionary new product or service. All this calls for building flexibility into your plan, so you can pivot to a new course if needed.

How Often Should a Business Plan Be Updated?

How frequently a business plan needs to be revised will depend on its nature. Updating your business plan is crucial due to changes in external factors (market trends, competition, and regulations) and internal developments (like employee growth and new products). While a well-established business might want to review its plan once a year and make changes if necessary, a new or fast-growing business in a fiercely competitive market might want to revise it more often, such as quarterly.

What Does a Lean Startup Business Plan Include?

The lean startup business plan is ideal for quickly explaining a business, especially for new companies that don't have much information yet. Key sections may include a value proposition , major activities and advantages, resources (staff, intellectual property, and capital), partnerships, customer segments, and revenue sources.

A well-crafted business plan is crucial for any company, whether it's a startup looking for investment or an established business wanting to stay on course. It outlines goals and strategies, boosting a company's chances of securing funding and achieving growth.

As your business and the market change, update your business plan regularly. This keeps it relevant and aligned with your current goals and conditions. Think of your business plan as a living document that evolves with your company, not something carved in stone.

University of Oregon Department of Economics. " Evaluation of the Effectiveness of Business Planning Using Palo Alto's Business Plan Pro ." Eason Ding & Tim Hursey.

Bplans. " Do You Need a Business Plan? Scientific Research Says Yes ."

Harvard Business Review. " Research: Writing a Business Plan Makes Your Startup More Likely to Succeed ."

Harvard Business Review. " How to Write a Winning Business Plan ."

U.S. Small Business Administration. " Write Your Business Plan ."

SCORE. " When and Why Should You Review Your Business Plan? "

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Types of companies in Company Law

This article is written by Parth Verma and further updated by Pruthvi Ramkanta Hegde . This article emphasises the types of companies under the Company Act 2013. The article further covers the advantages and disadvantages of different types of companies, conversion of companies, prospectus issuance, and illegal associations. This article has been written in the context of “The Companies Act, 2013”. Hence, this article must be read in light of the Companies Act, 2013. To download the said Act, click here .

Table of Contents

Introduction

In India, there are different kinds of businesses, each with its own set of rules. These rules are set by Indian Company Law. Whether a person is starting a small or big business, it is very essential to know about the types of companies covered by Indian law. These types decide things like who owns the business, who is responsible if something goes wrong, how the company is managed, and what rules it must follow.

According to Section 2(20) of the Companies Act, 2013, a “company” means a company incorporated under the Companies Act, 2013 or under any previous company law. The Companies Act of 2013 replaced the Companies Act, 1956. The Companies Act, 2013 makes provisions to govern all listed and unlisted companies in the country. The Companies Act 2013 implemented many new sections and repealed the relevant corresponding sections of the Companies Act 1956. This is landmark legislation with far-reaching consequences for all companies incorporated in India.

It is needless to say that we have a multitude of companies of various kinds. From corporate companies to one-person companies, we have so many kinds of companies. Mainly, these companies can be classified on the basis of size of the company, number of members, control, liability, and manner of access to capital. This article shall be talking in-depth about all such companies and various other kinds of companies too.

Types of companies on the basis of size or number of members in a company

Private company.

According to Section 2(68) of the Companies Act, 2013 (as amended in 2015), “private company” is defined as a company having a minimum paid-up share capital as may be prescribed and which, by its articles, restricts the right to transfer its shares. It can have a maximum of 200 members. As per this Section, the private company consists of the following rules:

• A private company needs to have a certain minimum amount of money invested in its shares. This amount is determined by the Act, but previously it was specified as one lakh rupees or a higher amount as prescribed by the government, but after the amendment made in the year 2015, it was omitted. 
• In a private company, the rules called Articles of Association (AoA) restrict how shares can be sold or transferred to others. This means shareholders cannot freely sell their shares to anyone outside the company without following specific procedures outlined in the company’s AoA.
• Typically, a private company can have a maximum of 200 members. However, there is an exception for one-person companies, which can have only one member. If multiple people jointly own shares, they count as a single member.
• Employees and former employees who still hold shares are not counted in this limit.
• Private companies cannot publicly invite people to buy their shares or other securities. They cannot advertise or solicit the general public to invest in their company. These rules are designed to provide certain benefits and protections to shareholders while also regulating the operations of the company. They ensure that private companies operate within a controlled environment and maintain a close-knit structure.

Advantages of private company

A private limited company enjoys the following advantages:

• Owners have more control over decision-making and operations since there are fewer shareholders.
• Private companies have greater flexibility in terms of management structure, business strategies, and financial decisions.
• There is less public scrutiny compared to public companies; therefore, it allows for greater privacy in financial matters and business operations.
• Private companies can often act more swiftly in response to market changes or business opportunities without the bureaucratic processes required by public companies.
• Private companies can focus on long-term growth strategies without the pressure of meeting short-term quarterly earnings expectations.
• A private company can be formed merely by two persons. It can start its business just after incorporation and doesn’t have to wait for the certificate of com­mencement of business.
• There are comparatively fewer legal formalities that are to be performed by a private company as compared to a public company. It also enjoys special exemptions and privileges under the company law. Thus, it can be concluded that there is greater flexibility in operations in a private company.
• In a private company, fewer people are to be consulted. The core people of the company who are to make decisions have a closer relationship (so to speak) and thus a better mutual understanding; hence, obtaining consent is usually not a problem, therefore making the process of making decisions faster.
• A private company is not required to publish its accounts or file several docu­ments. Therefore, it is in a much better position than a public company when it comes to the maintenance of business secrets.
• The same core people with close relations continue to manage the affairs of a private company. Due to their close relations, the continuity of policy can be maintained, as there is mutual trust and a low dispute attitude.
• There is a greater personal touch with employees and customers in a private company. There is also a comparatively greater incentive to work hard and to take initiative in the management of business.

Disadvantages of private companies

• Private companies may find it challenging to raise capital since they cannot sell shares to the public. They rely on personal savings, bank loans, or investments from a smaller pool of investors.
• Without access to public markets, private companies may face constraints in expanding their operations or undertaking large-scale projects.
• Private companies may have limited access to specialised skills and resources compared to larger public companies.
• Since private companies often have limited resources and access to capital, they may face a higher risk of failure, especially during economic downturns or market disruptions.
• Exiting or selling shares in a private company can be more difficult and may require the agreement of all shareholders. Thus, it makes it more challenging for investors to realise their investment.

Public company

Section 2(71) of the Companies Act, 2013 defines a “public company” as a company that is not classified as a private company and has a minimum paid-up share capital as prescribed by law. As per this Act, a public company consists of the following aspects:

• As per Section 3(1) of the Companies Act 2013, a public company must have a minimum of seven members, and there is no restriction on the maximum number of members. As per Section 149(1) of the Act, a public company consists of a minimum of 3 directors.
• As per Section 4(1)a of the Act, a public company having limited liability must add the word “limited” at the end of the name. The shares of a public company are freely transferable.
• A public company differs from a private company in various ways. Unlike private companies, which have restrictions on share transfers, public companies have more flexibility in trading their shares and can have a larger number of shareholders. This distinction impacts how the company operates, its governance structure, and its obligations to shareholders and regulatory authorities. 
• Earlier, public companies were required to have a certain minimum amount of money invested in their shares. This is known as the paid-up share capital. The law sets the minimum threshold at five lakh rupees, but the government may prescribe a higher amount. This requirement ensures that public companies have sufficient financial backing and stability to operate on a larger scale. However, the minimum requirement of paid capital of five lakh was omitted in the Amendment Act of 2015.
• If a company is owned by another company that is not private, such as a public company, even if it is still considered private according to its own rules, it is treated as a public company.

Registration of public company

In order to register the public company, the following aspects need to be considered: 

• There must be at least 7 shareholders and 3 directors to start a public limited company. Shareholders can be individuals, other companies, or Limited Liability Partnerships (LLPs), while directors must be individuals.
• Directors need a Director Identification Number (DIN) , which can be obtained by applying online through the Ministry of Corporate Affairs . Indian nationals need a PAN card for this.
• All promoters and directors must have a digital signature certificate for online document submission. These certificates are obtained from certifying authorities in India. For the Director Identification Number (DIN), a copy of a PAN card self-attested for Indian nationals and proof of address utility bills not older than 2 months, or a passport for foreign nationals, are required.
• Choose a location for the registered office and decide on the authorised capital of the company. The registered office can be any identifiable address, and there is no minimum capital requirement for a public limited company.
• The company’s name should end with ‘Limited’. Apply for name approval from the Registrar of Companies (ROC) through the Ministry of Corporate Affairs website. Submit multiple names in order of preference, and ensure they comply with the guidelines.
• Once a company name is approved, one needs to prepare the Memorandum of Association (MOA) and Articles of Association (AOA) in the prescribed format. These documents are now prepared electronically (eMoA and eAOA). Submit the eMoA and eAOA to the ROC for registration of the company.
• After due verification, the ROC will register the company and issue a Certificate of Incorporation (COI). After the issuance of the COI, a Corporate Identification Number (CIN) will be allocated to the company. For the Digital Signature Certificate (DSC), application forms need to be filled out and signed, and ID proof (passport, driving licence, PAN card, etc.), and address proof (passport, driving licence, utility bills, etc.) are required.
• Within a period of approximately six months, that is, 180 days from the official date of incorporation, a newly established company is required to complete and submit a form.

Advantages of a public company

• Public companies can easily raise funds by selling shares to the public through the stock market; this will facilitate their ability to expand and undertake activities like research. Thus, investors can easily buy and sell parts of a public company on the stock market. Hence, this makes it easier for investors to get in and out whenever they need.
• Public companies have more opportunities to team up with or buy other companies, which helps them to expand and do different things.
• Public companies are usually bigger and more noticeable, so they can offer better jobs and pay.
• They have greater access to mergers, acquisitions, and partnerships, which can help them grow and diversify their business.
• Public companies are more visible; hence, they can offer better job opportunities and pay.  

Disadvantages of a public company

• It’s harder to start a public company because one needs to create and file a detailed document called a prospectus, and rules must also be followed when giving out shares. 
• Public companies have many directors and managers. Decisions are made in meetings, which can take a long time.
• Public companies must share lots of documents with the government. Their financial information is made public. So, keeping business secrets is tough.
• Public companies must follow many rules. The government controls them a lot. This will limit the flexibility.
• In public companies, the owners and managers are often different. Paid managers may not have a strong reason to work hard. Further, it’s hard to maintain close relationships with customers and employees. Sometimes, there are conflicts between shareholders, lenders, and managers.
• Shares of public companies are traded every day. Some people may try to make quick money by gambling on these shares. This may have an impact on smaller shareholders.
• The people who own parts of the company, called shareholders, often want quick financial growth. They might push for quick profits, even if it means sacrificing long-term growth.
• When a company goes public, it loses some control. Shareholders and market expectations start to affect decisions, and the original owners might have less opportunity.
• Public companies might get sued by shareholders or government regulators, which can cost a lot and impact the company’s reputation.
• Public companies might face lawsuits from shareholders or regulators; this will be more costly and adversely impact the company’s reputation.
• Some investors might try to influence the company’s decisions to serve their own interests; this can create conflicts and cause disruptions in how the company operates.

Small company 

Section 2(85) of the Act defines ‘small company’ as a type of company that is not a public company. There are two main things that determine a small company, which include:

• Paid-Up Share Capital: This is the total value of shares paid to shareholders. This amount should not be too high. It used to be fifty lakh rupees, but now it can be higher, up to ten crore rupees or five crore rupees.
• Turnover: This is the total revenue a company  makes from its business activities. In small companies, the turnover for the previous year should not be too high. It used to be two crore rupees, but now it can be up to four crore rupees or forty crore rupees.

There are some exceptions to the above mentioned amount criteria. The companies stated below are exempt from such requirements, which include:

• Holding or Subsidiary Companies: These are companies owned or controlled by another company, known as a holding company, which manages and controls its subsidiaries.
• Section 8 Companies: These are non-profit companies formed for specific purposes.
• Companies Governed by Special Acts: These are companies governed by special laws for particular sectors.

Recent changes in the definition of small company 

The definition of a small company changed recently. The Companies Act of 2013 introduced the idea of small companies based on their paid-up share capital and turnover. Recently, the Ministry of Corporate Affairs made changes to the definition of a small company through an amendment on September 15, 2022 . Previously, the threshold for categorising a company as small based on turnover and paid-up share capital was two crore rupees and twenty crore rupees, respectively. However, with this amendment, the limit was increased to four crore rupees for paid-up capital and forty crore rupees for turnover. Now, the threshold for being small based on turnover and paid-up share capital is higher.

Effect of amendment 

The changes in the definition of a small company reduce the certification requirements for e-forms submitted to the Register of Companies (ROC) by practising professionals such as Chartered Accountants, Company Secretaries, and Cost Accountants. However, holding a Certificate of Practice (COP) opens up various opportunities beyond ROC compliance, including areas like intellectual property rights, litigation, and investment banking.

Role of small companies

Small companies are important for the economy. They contribute to the growth and development of the economy. They are registered similarly to private limited companies, but their status is determined by their paid-up share capital and turnover, not by a separate registration process.

One Person Company

The Companies Act, 2013 also provides for a new type of business entity in the form of a company in which only one person makes the entire company. It is like a one man-army. Under Section 2(62) , One Person Company (OPC) means a company that has only one person as a member. Features of OPC include:

• One person can set up and run the whole company as both the owner and director.
• While an OPC can have up to 15 directors, only one person can own it.
• At least one director must be an Indian resident who has lived in India for at least 182 days in the last financial year.
• No minimum capital is needed to register an OPC. The owner can invest as much as they want, and government fees are based on this.
• The owner’s liability is limited to the capital they have invested. This means their personal belongings are safe if the business faces losses or debts.
• OPCs are great for small businesses and startups with turnover below Rs. 2 crores and capital investment under Rs. 50 lakhs.
• Only Indian citizens can register an OPC. Foreign investment is not allowed, ensuring full ownership by Indian residents.
• The company’s name should include “One Person Company” in brackets as per Section 3(1)(c) of the law.

Members and directors

• As per Section 3(1)(c), OPC can have only one member. 
• As per Section 152(1) , the individual member is deemed the first director until other directors are appointed. 
• As per Section 149(7) , an OPC can have a minimum of one director and a maximum of fifteen directors, and a special resolution must be passed by the OPC in order to exceed fifteen directors.

An OPC must select one person as a ‘Nominee’ who will take over in case the sole member is unable to run the OPC due to reasons like death or incapacity. The nominee will:

• Become a new member of the OPC.
• Receive all the shares in the OPC.
• Be responsible for all the liabilities of the OPC.

The nominee’s consent to act as a nominee must be obtained and submitted to the Registrar of Companies (RoC) at the time of incorporation, along with the Memorandum of Association (MoA) and Articles of Association (AoA).

Withdrawal and replacement of nominee

• The nominee can withdraw their consent by giving written notice to both the sole member and the OPC.
• Upon withdrawal, the sole member must nominate another person as the new nominee within 15 days.
• The OPC must inform the RoC about the withdrawal of consent, name the new nominee, and obtain the written consent of the new nominee within 30 days of receiving the withdrawal notice.
• This information must be filed with the RoC using Form No. INC-4 along with the required fee, and the written consent must be submitted using Form No. INC-3.
• The nominee can be changed at any time by informing the RoC.

Limit on multiple memberships

If a person is a member of one OPC and becomes a member of another OPC as a nominee, they must choose to remain a member of only one OPC within 180 days. They need to withdraw their membership from one of the OPCs within this period.

Registration of OPC

In order to register an OPC, here are the steps one needs to follow:

• Get a Digital Signature Certificate (DSC) for the proposed director. This requires documents like address proof, an Aadhaar card, a PAN card, and contact details.
• Apply for the Director Identification Number (DIN) using the SPICe+ form. This form allows for applying for DIN for up to three directors at once.
• Apply for name approval for the company using the SPICe+ application. One needs to specify a preferred name. If rejected, another name can be submitted.
• Once the name is approved, prepare the necessary documents including the Memorandum of Association (MoA), Articles of Association (AoA), proof of registered office, and consent from the nominee in case the director becomes unable to act.
• File these documents along with forms like INC-9 and DIR-2 with the Registrar of Companies (ROC) using the SPICe+ Form, SPICe-MOA, and SPICe-AOA.
• The PAN number is automatically generated during incorporation.
• After verification, the ROC issues a Certificate of Incorporation, and the company can start operating.
• The OPC must have at least one member and a nominee, with the nominee’s consent obtained in Form INC-3.
• Make sure to comply with the Companies (Incorporation Rules) 2014 regarding the company name.

The whole process, from getting DSC and DIN to receiving the Certificate of Incorporation, usually takes around 10 days, depending on departmental approval and response times.

Advantages of OPC

• Setting up an OPC is relatively easy and requires only one person to start.
• An OPC offers limited liability protection to its owner; accordingly, personal assets are not at risk in the case of business debts.
• The owner has complete control over the company without sharing decision-making power with anyone else.
• An OPC is seen as its own legal entity, separate from its owner. This makes it look more credible and makes it easier to get funding.
• Compared to bigger companies, OPCs usually have fewer legal rules to follow and less paperwork to deal with, making it simpler to run the business.
• OPCs might enjoy tax benefits and incentives from the government, which can save money on taxes.
• Since there is only one owner, decisions can be made easily without needing to consult or get approval from others. This makes it easier to adapt to changes in the market.

Disadvantages of OPC

• Only one person can own an OPC, which might cause difficulty in growing and getting investments compared to larger companies with multiple owners.
• OPCs are owned by just one person and have to deal with a lot of legal paperwork and rules, which can be more complicated compared to businesses.
• Some people might think OPCs are less stable or reliable than bigger companies with more owners.
• OPCs have to appoint someone else to represent them, which might bother entrepreneurs who want to make all the decisions themselves.
• With just one owner, OPCs might find it hard to get enough money, expertise, or connections, making it tough for them to grow.
• If something happens to the owner, like if they get sick or pass away, it can be hard to figure out what to do with the OPC next, especially if there is no plan in place.
• Selling or giving away an OPC can be complicated and might scare off potential buyers or investors because of all the legal stuff involved.

Types of companies on the basis of control

Holding company.

A holding company is a company that owns one or more other companies. These other companies are called subsidiary companies because they are controlled by the holding company. So, the holding company is like the parent company, and the subsidiaries are its smaller companies. Such a type of company, directly or indirectly, via another company, either holds more than half of the equity share capital of another company or controls the composition of the Board of Directors of another company. 

Definition of holding company

Section 2(46) of the Companies Act, 2013 defines a holding company as “ a holding company, in relation to one or more other companies, means a company of which such companies are subsidiary companies.”

Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.

Further explanation

• The composition of a company‘s Board of Directors would be deemed to be controlled by another company if that other company, by the exercise of some power exercisable by it at its discretion, could appoint or remove all or a majority of the directors;
• The expression “company” includes any body corporate;
• ”Layer” in relation to a holding company means its subsidiary or subsidiaries.”

A company can become the holding company of another company in any of the following ways: 

• by holding more than 50% of the issued equity capital of the company,
• by holding more than 50% of the voting rights in the company,
• by holding the right to appoint the majority of the directors of the company.

How it works

A corporation can become a holding company in two main ways. One way is by buying enough shares in another company to have control over it. The other way is by starting a new company and keeping some or all of its shares. Even if a holding company owns just a small part of another company’s shares, like 10%, it can still control its decisions. The main connection between a holding company and the companies it controls is called a parent-subsidiary relationship. The holding company is like the parent, and the company it buys or controls is like the child, called the subsidiary. If the parent company owns all the shares of the other company, it’s called a wholly-owned subsidiary.

Types of holding companies

In general, these companies can be bifurcated into the following types:

• Pure : A pure holding company only owns shares in other companies and does not do any other business.
• Mixed: A mixed holding company not only owns other companies but also does its own business.
• Immediate: An immediate holding company owns another company, even if it is already owned by someone else.
• Intermediate: An intermediate holding company is both a holding company and a subsidiary of a larger corporation. It might not have to share financial records like a regular holding company.

Merits of a holding company

• A holding company owns different businesses, so if one business faces problems, the others can step in to help, lowering overall risk.
• By managing everything together, a holding company can save money on things like purchasing supplies or advertising because they buy in bulk for all their businesses.
• A holding company can choose where to invest money, people, and technology to help its businesses grow and succeed.
• Sometimes, a holding company can pay less in taxes because it can balance out profits and losses between its businesses, potentially reducing its tax bill.
• A holding company can control its different businesses while still allowing them to make their own decisions. This gives it flexibility in how it operates.

Demerits of a holding company

• Managing many different businesses can be challenging, and it will slow down decision-making processes.
• Holding companies have to follow rules for each business they own, which can be a lot of work and cost money to ensure compliance.
• If one business owned by the holding company faces financial trouble, it can affect the other businesses, potentially amplifying the problem.
• Sometimes, the holding company’s objectives might clash with the goals of its businesses, which may lead to disagreements and conflicts in decision-making.

Subsidiary company

A subsidiary company is a company that is both owned and controlled by another company. The owning company is called a parent company or a holding company. The parent of a subsidiary company may be the sole owner or one of several owners of the company. If a parent or holding company possesses complete ownership of another company, that company is referred to as a “wholly-owned subsidiary.” There is a difference between a parent company and a holding company in terms of operations. A holding company doesn’t have its own operations but owns most of the shares and assets of its subsidiary companies. It is basically a company that operates a business and also owns another business, known as the subsidiary. The holding company runs its own operations, while the subsidiary might engage in a related business. For example, the subsidiary might handle owning and managing the holding company’s property assets to keep their liabilities separate. 

Definition of subsidiary company

As per Section 2(87) of the Act, a subsidiary company is a company that is controlled by another company, called the holding company. Accordingly, a company that operates its business under the control of another (holding) company is known as a subsidiary company. Examples include Tata Capital, a wholly-owned subsidiary of Tata Sons Limited. This control can happen in two ways:

• The holding company controls who sits on the subsidiary company’s Board of Directors.
• The holding company owns more than half of the total shares of the subsidiary company.

Even if the control is exercised through another subsidiary company of the holding company, the subsidiary is still considered part of the group. For instance, if the holding company’s subsidiary controls the Board of Directors or owns more than half of the shares in another company, that company becomes a subsidiary too. 

Types of subsidiary company

In general, the subsidiary company can be divided into the following categories:

• Wholly owned subsidiary company : A wholly owned subsidiary is a company where the holding company owns all of its voting power. This means that 100% of the subsidiary’s shares are held by the holding company.
• Deemed subsidiary company : A deemed subsidiary is a company considered to be under the control of a holding company, even if that control comes from another subsidiary of the holding company.

Determination of subsidiary company

• It is important to know the difference between the money invested in a company’s shares and the voting power those shares carry. The ownership of a company is determined by its shareholders. The total value of shares that have voting rights is important. When a vote is taken at a meeting, each member usually gets one vote. But if there is a poll, the ‘one share, one vote’ rule applies.
• For companies that are fully owned by another company, their AoA might give them special powers to appoint or remove directors. Checking these AoAs is important to understand the level of control the parent company has over the subsidiary.
• Besides the AoA, there might be other agreements between the companies that outline their relationship and the powers the parent company has over the subsidiary. These agreements could come into play during mergers, acquisitions, or other business arrangements. Checking these agreements is important to understand the extent of control the parent company has over the subsidiary.

Shared relationships between holding company and subsidiary company. 

A holding company and subsidiary have certain common grounds on which they share relationships, such as:

Consolidated balance sheet

It is the accounting relationship between the holding company and the subsidiary company, which shows the combined assets and liabilities of both companies. The consolidated balance sheet shows the financial status of the entire business enterprise, which includes the parent company and all of its subsidiaries.

Management and control

The autonomy of a subsidiary company may seem to be merely theoretical. Besides the majority stockholding, the holding company also controls the important business operations of a subsidiary. For example, the holding company takes charge of preparing the by-laws that govern the subsidiary, especially for matters pertaining to hiring and appointing senior management employees.

Responsibility

The subsidiary and holding companies are two separate legal entities; any of them may be sued by other companies, or any of these companies may sue others. However, the parent company has the responsibility of acting in the best interest of the subsidiary by making the most favourable decisions that affect the management and finances of the subsidiary company. The holding company may be found guilty in  court for breach of fiduciary duty if it does not fulfil its responsibilities. The holding company and the subsidiary company are perceived to be one and the same if the holding company fails to fulfil its fiduciary duties to the subsidiary company.

Investment in holding company

A subsidiary company can’t hold shares in its holding company. Any company can, neither by itself nor through its nominees, hold any shares in its holding company, and no holding company shall allot or transfer its shares to any of its subsidiary companies, and any such allotment or transfer of shares of a holding company to its subsidiary company would be void.

Provided that nothing in this subsection shall apply to a case;

• where the subsidiary company holds such shares as the legal representative of a deceased member of the holding company; or
• where the subsidiary company holds such shares as a trustee; or
• where the subsidiary company was a shareholder even before it became a subsidiary company of the holding company.

Types of companies on the basis of ownership

On the basis of ownership, companies can be divided into two categories:

Government company

“Government company” under Section 2(45) of the Companies Act, 2013 is essentially defined as “ any company in which not less than 51% of the paid-up share capital is held by the Central Government, or any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company. ” The definition ensures that any company falling within the ambit of equal to or more than 51% ownership by the central government, any state government or governments (including more than one state’s government), or a combination of central and state ownership, is recognized as a government company. Further, this classification extends to subsidiary companies that are under the control or ownership of such government companies. 

Some examples of government companies are National Thermal Power Corporation Limited (NTPC), Bharat Heavy Electricals Limited (BHEL), Steel Authority of India Limited, etc.

Overview of government companies 

Government companies have to follow all the rules of the Companies Act, unless there are specific exceptions. They can be registered as either private or public companies, but their names must end with ‘limited.’ In the names of government companies, the word ‘ STATE ’ is allowed. When it comes to transferring shares or bonds in government companies, certain formalities, like executing transfer documents, are not needed when transferring securities held by government nominees. These companies can accept deposits up to a certain limit, and their annual general meetings must be held during business hours and on non-national holidays. A government company gives its annual reports, which have to be tabled in both the House of the Parliament and the state legislature, as per the nature of ownership. 

In the director’s report of government companies, certain clauses about policies on director appointments and remuneration do not need to be included, as these requirements are relaxed for government companies. A subsidiary of a government-owned company is also considered a government company. These companies, managed by the government, have both government and private individuals as shareholders. They are sometimes called mixed-ownership companies. As per Section 188, the requirements for seeking approval for contracts or arrangements between government companies or between a government company and another entity have been relaxed. As per Section 188(1) , transactions between two government companies or between an unlisted government company and another entity do not need special resolution approval, provided the administrative ministry or department gives prior approval.

Features of a government company

There are several features of a government company that are helpful in increasing the potential and efficiency of the company to a great extent.

Separate legal entity

Perhaps one of the most important features of a government company is that it is a separate legal entity, which helps a government company to deal with many legal aspects. One main legal aspect is the non-dependence on any other body. In legal terms, as it is a separate entity in itself, this makes the system more fluent and efficient.

Incorporation under the Companies Act 1956 & 2013

A government company is incorporated under “the Companies Act, 1956 & 2013”. This gives government companies boundaries to work within, and hence it profits the end-users of the services as there are fewer chances of fraud or improper working. Also, the employees get better working conditions and are not exploited, as they have the law as their backup to protect them.

Management as per provisions of the Companies Act

Management in a government company is governed and regulated by the provisions of the Companies Act. This makes sure that employees are not exploited and overburdened. This further ensures the smooth functioning of the company.

Appointment of employees

The appointment of employees is governed by the MoA and AoA (Memorandum of Association and Articles of Association). This ensures a fair appointment on the basis of meritocracy, and people don’t misuse their contacts and enter government companies.

Fund raising

A government company gets its funding from the government and other private shareholdings. The company can also raise money from the capital market. Hence, a government company has several fund raising mechanisms, which helps it to be financially less burdened as finances in a government company can be raised in a lot of ways.

Appointment of directors

• As per Section 134L(3)(p) of the Act, listed and certain public companies must report on how they evaluated their board, committees, and individual directors.
• According to Section 149(1)(b) , government companies can have more than 15 directors without needing a special resolution to appoint them.
• In Section 149(6)(c) , which states the criteria for selecting independent directors, it is usually required that these directors do not have any financial connections to the company or its affiliates. However, this rule does not apply to government companies. So, even if a director has financial ties to the government company or its related companies, they can still be appointed as independent directors.
• If the Central or State Government appoints a director, they do not need to formally consent to the appointment or file paperwork with the Registrar of Companies within 30 days.
• Under Section 196 , government companies are exempt from certain provisions related to appointing or re-appointing managing directors, whole-time directors, or managers for terms exceeding 5 years. Section 196(2) , Section 196(4) , and Section 196(5)   are also exempt from the requirement to seek approval from the board and members for such appointments, if not in accordance with Schedule V. The notice for board or general meetings does not need to include terms and conditions of appointment. There is no need to file returns of appointments within 60 days with the Registrar of Companies. Acts performed by the appointed personnel before approval at a general meeting are considered valid.

Merits of government companies

• Government companies have the freedom to make decisions independently. This autonomy allows them to respond quickly to changes in the market or in their operations. 
• Government companies play an important role in ensuring that the local market remains fair and competitive. They do this by controlling certain aspects of business activities, such as pricing or quality standards, to prevent unfair practices like monopolies or price gouging. 
• Government companies can bring together different strengths and resources to solve the complex problems of private companies. Private companies sometimes face challenges like not having enough money or struggling to achieve their goals. Government companies often have access to additional funding or resources that private companies may lack. By joining with government companies, private companies can benefit from the financial support, expertise, and networks of government companies to overcome obstacles. 

Limitations of a government Companies

• Government companies usually have to face a lot of government interference and the involvement of too many government officials. Hence, it has to go through lots of checks in order to make a stable decision. Governmental decisions are usually late as they follow an elaborate procedure before actual implementation.
• These companies evade all constitutional responsibilities by not answering to the parliament because they are financed by the government.
• The efficient operations of these companies are hampered, as the board of such companies comprises mainly politicians and civil servants, who have special emphasis and interest in pleasing their political party’s co-workers or owners and are less concentrated on the growth and development of the company. They (politicians and civil servants) are essentially focused on their promotions, which are essentially in the hands of their seniors; hence, they keep on pleasing their seniors. In order to please their seniors, they usually make the wrong decisions too.

Non-Government Company

All other companies, except the government companies, are known as non-government companies. They do not possess the features of a government company, as stated above.

Associate companies

According to Section 2(6 of the Companies Act, 2013, when one company owns at least 20% of the shares of another company, the second company is considered an “associate company” of the first one. For companies say X and Y, X in relation to Y, where Y has a significant influence over X, but X is not a subsidiary of Y and includes a joint venture company. Here X is an associate company. Wherein;

• The expression “significant influence” means control of at least twenty percent of total voting power, or control of or participation in business decisions under an agreement.
• The expression “joint venture” means a joint agreement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.

If a company is formed by two separate companies and each such company holds 20% of the shareholding, then the new company shall be known as an associate company or joint venture company. The Companies Act 2013, introduced for the first time the concept of an associate company or joint venture company in India through Section 2(6). A company must have a direct shareholding of more than 20%, and an indirect one is not allowed. For example, A holds 22% in B and B holds 30% in C. In this case, C Company is an associate of B but not of A.

Comparison of the definition of associate company with the Amendment Act 2017 

Before amendment, the term ‘associate company’ refers to a company that another company has a significant influence over, but it is not fully owned like a subsidiary. Before an amendment to the law, this influence was measured by how much of the total share capital one company controlled or if it had a say in important business decisions through agreements. For instance, if Company A had between 20% and 50% control over Company B’s shares or business decisions, Company B would be considered an associate of Company A.

However, after the Amendment Act of 2017 , the focus shifted slightly. Now, the level of influence is determined by the voting power rather than just the share capital. So, if Company A controls between 20% and 50% of Company B’s voting power or has a say in its business decisions through agreements, Company B is still considered an associate of Company A. Additionally, the amendment clarified what constitutes a joint venture by ensuring that all partners in such arrangements are properly recognised. These changes intend to make it clearer how much influence one company has over another and also ensure that all relevant parties, especially in joint ventures, are accounted for properly.

Foreign companies

A foreign company, as per Section 2(42) of the Companies Act, means a company or a corporate body that is incorporated outside India which either has a place of business in India whether by itself or through an agent, either physically or through an electronic mode, and conducts any business activity in India in any other manner.” The definition states that the company has some kind of physical location or representation in India. It could be an office, a store, a factory, or any other place of business. This presence could be established directly by the company itself or indirectly through an agent. Additionally, having an online presence or conducting business electronically also counts. For Section 2(42) of Companies Act, 2013, and Rule 2(c) of the Companies (Registration of Foreign Companies) Rules, 2014, ‘electronic mode’ means conducting activities electronically, regardless of whether the main server is in India. This includes:

• Business transactions between businesses and consumers, exchanging data, and other digital supply transactions.
• Accepting deposits, subscriptions in securities, or offering securities in India or to Indian citizens.
• Financial settlements, online marketing, advisory and transactional services, managing databases, and supply chains.
• Online services like telemarketing, telecommuting, telemedicine, education, and research.
• Any related data communication services, whether using email, mobile devices, social media, cloud computing, document management, or voice and data transmission.

Provided that offering securities electronically, subscribing to them, or listing securities in International Financial Services Centres under the Special Economic Zones Act, of 2005, is not considered ‘electronic mode’ for the purposes of the Companies Act, 2013.

Accounts of foreign company

Section 381 of the Companies Act, 2013 states the rules or instructions about how a foreign company’s accounts are to be handled. It states that:

• make a balance sheet and profit and loss account in such a form as contains all such particulars and includes or has annexed or attached thereto such documents as may be prescribed,
• must deliver a copy of those documents to the Registrar, provided that the Central Government may, by notification, direct that, in the case of any foreign company or class of foreign companies, the requirements of above-pointer “a” wouldn’t apply or would apply subject to such exceptions and modifications as may be specified in that notification.
• If any document as mentioned in Section 381(1) of the Companies Act, 2013 is not in the English language, there shall be annexed to it a certified translation thereof in the English language.
• Every foreign company shall send to the Registrar, along with the documents required to be delivered to him under sub-section (1), a copy of a list in the prescribed form of all places of business established by the company in India as of the date w.r.t. reference to which the balance sheet referred to in sub-section (1) is made.

Registration requirements for foreign companies under the Companies Act

Submission of documents to registrar.

As per Section 380, foreign companies must provide certain documents to the registrar within 30 days of establishing their place of business in India. These include:

• A certified copy of the company’s charter, statutes, or memorandum and articles, translated into English if necessary.
• Full address of the company’s registered or principal office.
• List of directors and secretary with required particulars.
• Name and address of persons in India authorised to accept service of process.
• Address of the company’s principal place of business in India.
• Details of previous establishment closures.
• Declaration regarding directors and authorised representative’s history.
• Any other prescribed documents.

Accounting obligations

As per Section 381, foreign companies must prepare a balance sheet and profit and loss account annually in the prescribed format and language. These documents, along with a list of Indian business locations, must be filed with the registrar. If not in English, certified translations are required. Accounts must be audited by a practising chartered accountant in India.

Name display requirement

As per Section 382 , foreign companies must display their name and country of incorporation outside all Indian offices and on business correspondence. Additionally, if applicable, they must indicate limited liability status.

Service process on foreign companies

As per Section 383 , any documents served on a foreign company must be sent to the authorised persons in India whose details are provided to the registrar. However, now electronic services are acceptable for this purpose.

Other compliance matters

As per Section 384 , foreign companies must adhere to regulations concerning debentures, annual returns, registration of charges, and bookkeeping. Charges on properties, whether in or outside India, must be registered. They must maintain proper accounts at their principal place of business in India. Inspection procedures apply to their Indian operations.

Prospectus and winding Up

As per Section 391 , foreign companies issuing prospectuses or Indian Depository Receipts must comply with relevant regulations. Procedures for winding up foreign companies in India are outlined, including penalties for non-compliance. A foreign company that ceases business in India may be wound up as an unregistered company, according to Section 376 of the Companies Act, 2013.

Capital Raising

Foreign companies can raise capital in India privately or through public offerings, subject to prospectus requirements. Indian Depository Receipts (IDRs) may be issued, provided specific conditions are met.

Foreign companies can register in India through various means, including:

• Private Limited Company: This is the quickest option. Foreign nationals can establish a private limited company, allowing up to 100% Foreign Direct Investment (FDI) under the automatic route.
• Joint Venture: Foreign entities can partner with local firms in India through a joint venture. A joint venture agreement outlines terms and must comply with legal standards.
• Wholly-Owned Subsidiary: Foreign nationals or companies can invest 100% FDI in an Indian company, creating a wholly-owned subsidiary.
• Liaison Office: This office facilitates communication between the foreign company and Indian entities. Expenses are covered by the parent company through foreign remittances.
• Project Office: For specific projects awarded by Indian companies, foreign companies can set up project offices. Approval from the Reserve Bank of India may be necessary.
• Branch Office: Large foreign businesses can establish branch offices in India, provided they demonstrate profitability and meet certain criteria.

Compliance for foreign companies operating in India

• If a foreign company stops working in India, it might need to close down as per Section 376 of the Companies Act, 2013.
• Foreign companies in India fall into categories like Liaison Office (LO), Branch Office (BO), or Project Office (PO) under the Foreign Exchange Management Act (FEMA), 1999.
• When starting a Liaison or Branch Office, the company must inform the police within five days, as per FEMA regulations.
• Branch and liaison offices must provide a yearly report along with financial statements to the Reserve Bank of India (RBI) by September 30, according to FEMA rules.
• If a branch, liaison, or project office is closing down, it must submit the necessary documents to a designated bank by following FEMA provisions.
• Indian companies receiving or investing foreign money must report their finances annually by July 15, as mandated by FEMA regulations.

For example, ABB is a foreign company that originally focused on manufacturing electronic equipment. ABB has since expanded its operations into various sectors, including robotics, automation, and rail transport. The parent company of ABB is owned by Investor AB, which is associated with the Wallenberg family.

Section 8 Companies (non profit companies)

Section 8 Companies, as defined under the Companies Act, 2013, are entities that promote various objectives such as commerce, art, science, education, research, social welfare, religion, charity, and environmental protection. These companies operate with the intention of utilising their profits for the betterment of society rather than distributing dividends to their members. If the Central Government is convinced that a person or group aims to form a company under the Companies Act, 2013 for purposes like promoting commerce, art, science, sports, education, charity, etc., intends to use its profits for these aims, and won’t distribute dividends to its members, it can grant a licence for registration. When a Section 8 company is registered, it does not need to include words like ‘Limited’ or ‘Private Limited’ in its name, unlike other types of limited companies. It is often referred to as a non-profit organisation because its main purpose is to benefit society rather than generate profits for its members.

History of Section 8 company

Under the Companies Act of 1913, there were rules made for starting companies that wanted to do good things, like helping people or the environment. These companies didn’t have to use words like ‘limited’ or ‘private limited.’ Later, the Companies Act of 1956 allowed for the creation of companies that were focused on doing charity work. These were called Section 25 companies. Later on, the Bhabha Committee suggested some changes to the laws about how companies are run and how charities are set up. In 2013, they updated the law, called Section 8, which replaced the old Section 25. It made it easier for companies to be formed for things like helping society, education, health, or the environment. These companies cannot give profits to their owners; instead, they have to use the money for their charity work. The Indian Constitution states that both the central and state governments can make rules about charities. ‘Trust and Trustees’ in Entry No. 10 of the Concurrent List, and ‘Charities & Charitable Institutions, Charitable and Religious Endowments, and Religious Institutions’ in Entry No. 28 of the Indian Constitution allow that both the central g and state governments have the authority to legislate and regulate charitable organisations.

Characteristics of Section 8 company

• Section 8 Companies are established with a primary intention of social welfare and charitable activities rather than profit-making.
• Unlike other companies, Section 8 companies do not require a minimum prescribed paid-up share capital.
• These companies are licensed by the central government under Section 8 of the Companies Act, 2013, and are mandated to work for the betterment of society. 
• These companies often receive donations from the general public for their welfare projects.
• Section 8 Companies operate with limited liability, similar to private or public limited companies, where liability of members is restricted to the extent of their share subscription.
• Section 8 Companies are legally prohibited from distributing dividends to their members. Instead, they can reinvest their profits to further their charitable projects. The company’s objectives should align with promoting various social causes, and it should plan to use its profits for these objectives without distributing dividends to members.
• Once a company is registered, it enjoys the benefits and must follow the obligations of other limited companies. Even a firm can be a member of such a company.
• The company cannot change its memorandum or articles without prior approval from the Central Government. It can be converted into another type of company with prescribed conditions.
• Existing limited companies with charitable objectives can apply to be registered under this section, omitting ‘Limited’ or ‘Private Limited’ from their name.

Regulatory Control

• The Central Government can revoke the licence if the company violates the requirements or conducts affairs against the public interest. The government directs to change its name to include ‘Limited’ or ‘Private Limited.’
• If the licence is revoked, the company may be wound up or merged with another similar company in the public interest.
• In the public interest, the Central Government can force amalgamation with another similar company, specifying terms and conditions.
• After settling debts, remaining assets may be transferred to another similar company or credited to a government fund, subject to conditions.
• Failure to comply with these rules may result in fines or imprisonment for directors and officers, especially if fraudulent conduct is proven.

Steps to incorporating Section 8 companies

• Start by selecting a name for the company and applying for its reservation through the SPICe Plus (SPICe+) form. If the chosen name is rejected, one can try again with two new names within 15 days of rejection.
• Apply for a DSC for each proposed director and member. This certificate will be used for electronically signing forms.
• Once the company name is approved, it is valid for 20 days, and further, one needs to fill out the incorporation application form online within the given timeframe.
• The SPICe+ form combines multiple forms into one, allowing applications for name reservation, incorporation, DIN, TAN, PAN, EPFO, and ESIC registration simultaneously.
• Provide details such as the total number of directors and members, authorised and paid-up capital, company address, director and member details, and attach necessary documents like MOA, AOA, and EPFO/ESIC registration forms. For Section 8 companies, additional documents like physically signed MOA and AOA drafts and declarations in Form INC-14 are required.
• Upon approval of a company’s incorporation application and the issuance of the Certificate of Incorporation by the Registrar of Companies (ROC), it is necessary to obtain approval to commence business within 180 days.

Eligibility requirements for registration

To qualify for registration, the primary aim must be to advance social welfare, arts, education, science, commerce, or provide financial aid to underserved communities. All profits generated must be dedicated to furthering the organisation’s goals and fulfilling its objectives. No dividends may be distributed to any members or directors, either directly or indirectly. Directors or promoters are prohibited from receiving any form of remuneration. A well-defined vision and project plan for the company’s operations over the next three years are essential.

Advantages 

• These companies have a distinct legal entity separate from their members, offering protection from personal liability for company debts.
• Member’s liability is limited to the extent of their shareholding, safeguarding personal assets from company debts.
• Section 8 Companies can be incorporated without any minimum paid-up capital, facilitating easier establishment.
• The incorporation of Section 8 companies incurs minimal stamp duty, as the government provides certain privileges to encourage such entities.
• Unlike other companies, Section 8 companies may choose not to include suffixes like ‘private limited’ or ‘limited,’ by offering flexibility in naming conventions.
• Section 8 Companies can avail themselves of tax benefits by obtaining registration under Sections 80G and 12AA of the Income Tax Act.

Disadvantages 

• Section 8 companies cannot share profits with their owners. This might make it harder for them to attract investors or make money compared to regular companies.
• These companies have to follow many rules set by the government. This means they might need to spend more time and money to make sure they are doing everything right.
• Section 8 companies often rely on donations or grants to keep going. If they don’t get enough donations, they might struggle financially.
• they can’t share profits or pay their leaders; they might find it tough to attract talented people or change how they do things when needed.
• Since they cannot keep profits to help them grow, they might not be able to expand or improve as quickly as regular companies.

Dormant Company

A dormant company is a type of company that is inactive or not doing any business activities for a certain period. In other words, a company may be considered dormant if it has not carried out any business operations or significant transactions for a specific period, typically two consecutive financial years or If a company has not filed its financial statements or annual returns for two consecutive years, it might also be labelled as dormant. 

Being dormant does not mean the company has shut down. It is still registered, but it is not actively engaged in any business activities. Companies may become dormant for various reasons, such as waiting to start a new project, holding assets, or temporarily pausing operations. It is defined as an ‘inactive company’ under the Companies Act 2013. Even though a company is dormant, it still has some responsibilities. It needs to maintain a minimum number of directors, file certain documents, and pay any required fees to keep its dormant status. A dormant company can become active again by applying to the registrar and fulfilling the necessary requirements, such as submitting financial documents and paying any outstanding fees.

As per Section 455 of the Companies Act 2013, an ‘inactive company’ is one that has not done any business or significant transactions or filed financial documents for the past two years. A ‘significant accounting transaction’ is any transaction except for a few specific ones, like paying fees to the government or maintaining office records. 

Registration of a dormant company

• If a company hasn’t been active and wants to be officially recognised as ‘dormant,’ it can apply to the registrar, the official in charge of company registrations, in a specific way.
• The registrar will review the application and, if everything checks out, grant ‘dormant’ status to the company. They will provide a certificate to confirm this.
• The registrar will keep a list of all dormant companies.
• If a company hasn’t filed its financial documents for two years in a row, the registrar will send a notice. If the company still doesn’t comply, it’ll be listed as dormant.

Requirements to maintain dormant status

A dormant company must have a minimum number of directors, submit certain documents, and pay a fee to the registrar to maintain its dormant status. If it wants to become active again, it can apply and fulfil the necessary requirements.

Removal from dormant register

If a dormant company does not meet the requirements or comply with the rules, the registrar can remove it from the list of dormant companies.

Annual return

Dormant companies file an annual return of Dormant Company (MSC-3) within 30 days from the end of each financial year, along with audited financials.

Board meetings

At least 1 board meeting every 6 months with a gap of at least 90 days between meetings.

Application for active status

• Use Form MSC-4 along with the MSC-3 return for the financial year.
• If a company remains dormant for 5 consecutive years, the registrar may initiate the process to strike off its name.
• If a dormant company starts operating again, an application for active status must be filed within 7 days.
• If the registrar suspects a dormant company is operating, an inquiry may be initiated. If it is confirmed, the company’s dormant status may be revoked.

Merits of the dormant company

• Dormant status allows the company to remain registered and legally existent without actively engaging in business operations. This means the company can be revived and used in the future without the need for re-registration.
• Dormant companies can hold assets such as properties, intellectual property rights, or investments without the need for an active business operation.
• By maintaining dormant status, the company can retain its business name, preventing others from registering a company with the same name during the dormant period.
• Reviving a dormant company is generally simpler and faster than incorporating a new company. This allows for a quicker resumption of business activities when needed.
• Keeping the company dormant instead of closing it down entirely helps preserve its reputation and goodwill in the market.
• Dormant status provides flexibility for future business ventures or projects. The company can be activated when there is a need to engage in business activities without the need for a new incorporation process.

Nidhi companies

Nidhi companies are a type of Non-Banking Financial Institution (NBFC) recognized under the Companies Act, 2013, primarily dealing with lending and borrowing within their members.  Nidhi companies are mutual benefit societies, meaning they are owned by their members who contribute to and benefit from the company. The core activity of a Nidhi company is to cultivate the habit of thrift and savings among its members and to lend funds to them for their mutual benefit.

Section 406 of the Act deals with the power of the Central Government to modify the application of the Companies Act to Nidhi companies. Accordingly, this section states that: 

• A Nidhi is a company formed with the goal of encouraging thrift and savings among its members. It collects deposits from and lends to its members only, for their mutual benefit, and follows rules set by the Central Government.
• The Central Government can decide which provisions of the Companies Act should or should not apply to Nidhi companies. It can specify exceptions, modifications, or adaptations for these companies through notifications.
• Before issuing such notifications, a draft must be presented to both Houses of Parliament for review. This draft must be available for a total of thirty days during parliamentary sessions. If both Houses agree to disapprove the notification or suggest modifications within this period, the notification won’t be issued or will be issued in a modified form.

Characteristics of the Nidhi companies

• Nidhi companies cannot deal with any other type of financial business except lending and borrowing among their members. They are not allowed to deal with the public.
• To become a Nidhi company, one needs to register as a public company under the Companies Act, 2013, and meet certain criteria set forth by the Ministry of Corporate Affairs.
• Nidhi companies need to comply with specific regulations outlined by the government to maintain their status and function as per the law. Membership in a Nidhi company is limited to individuals only. Other types of entities, like companies or trusts, cannot become members.
• Nidhi companies cannot accept deposits or loans from people who are not their members, ensuring that their activities are focused solely on the mutual benefit of their members.

Doctrine of Ultra Vires

MoA of any company is the basic charter of that company. It is a binding document that narrates the scope of that company, about which it was written. Ultra vires is a Latin phrase, which means “beyond the powers.” In the legal sense, the “Doctrine of Ultra Vires” is a fundamental rule of the Company Law. It states that the affairs of a company have to be in accordance with the clauses mentioned in the Memorandum of Association and can’t contravene its provisions. Therefore, any act or contract is said to be void and illegal if the company doing the act attempts to function beyond its powers, as prescribed by its MoA. So, it can be stated that for any contract or any act to not fall under this criteria, one has to work under the MoA. It is noteworthy that a company can’t be bound by means of an ultra vires contract. Estoppel, acquiescence, lapse of time, delay, or ratification cannot make it ‘Intra Vires’ (an act done under proper authority is intra vires ). An act being ultra vires the directors of a company, but intra vires the company itself, can be done if members of the company pass a resolution to ratify it. Also, an act being ultra vires the AoA of a company can be ratified by a special resolution at a general meeting.

Disadvantages of this doctrine

This doctrine stops the company from changing its activities in a direction agreed upon by all members, which, if done, would be profitable to the company. This is because clauses of the MoA don’t allow the company to go in that direction. If any Act done by the directors, on behalf of the company, contravenes the clauses of the MoA, the MoA can be amended by virtue of passing a resolution, pursuant to which the aforesaid Act will become intra vires, vis-a-vis the MoA. This defeats the whole purpose of having such a doctrine, as then any act can be done, no matter what, since the clauses of the MoA can be amended at any time in order to make any action legal.

When private limited company becomes a public limited company

A private limited company is usually preferred by businessmen because of all the special privileges it enjoys. In private limited companies, the capital is derived from close friends, relatives and known persons and not from the public. Therefore, the Companies Act, of 1956 does not impose stringent rules and regulations on private limited companies when compared to public limited companies. However, in certain circumstances, a private limited company would become a public company.

Conversion by default

• Conversion by operation of law
• Conversion by choice or by option

A private company:

• Restricts the right to transfer shares,
• Limits the maximum number of members to 50,
• Prohibits inviting the public for subscription of shares or debentures.

Upon violation of any of these terms, a private company would become a public company by default.

Conversion by operation of law : deemed public company

A private company is converted into a public company (by the operation of law):

• When equal to or more than 25% of the paid-up share capital of a private company is held by one or more public companies,
• When the average total turnover of a private company is more than or equal to Rs. 25 crore for three consecutive years,
• When a private company holds more than 25% of the paid-up share capital of a public company.
• When the private company invites, accepts, or renews the deposits from the public.

Conversion by choice or option

If desired, then, out of its own free will, a private company can get itself converted into a public company. Generally, when private companies want to expand and therefore require more capital resources, they convert themselves into public companies.

By becoming public companies, they (the private companies) can issue shares or debentures to the public and hence get the amount of capital required. In India, many organisations that commenced their operations as private companies got themselves converted into public limited companies in order to expand and diversify.

Any private company which desires to be converted into a public company has to make the necessary changes to its  articles and follow the below-mentioned steps:

• It should call for a general meeting and, therein, pass a special resolution by following proper protocols, hence altering the articles.
• The copy of the resolution, along with the amended articles, is to be filed with the registrar within 30 days of passing the special resolution.
• The number of members should be increased to 7.
• The company has to apply to the registrar in order to obtain a fresh certificate of incorporation wherein the word ‘Private’ is deleted from its name.

Conversion of a public company into a private company

In order to convert a public company into a private company, it involves changing its legal structure and ownership from being publicly traded to being privately held. The following procedures are involved while doing such conversions:

Pre-requisites for filing an application for conversion from public to private company

Certain pre-requisites for filing an application for conversion from a public to a private company 

Limit of shareholders

Although there is no limit on the maximum strength of shareholders in a public limited company, post-conversion into a private limited company, it becomes mandatory to ensure that the maximum strength doesn’t cross the threshold of 200 shareholders.

Non-invitation of funds from public

Post conversion, no funds or capital should be raised from the general public, either through the issuance of the prospectus or any other means.

Non-listing of company

Prior to conversion, it must be assured that the company was never listed on the stock exchange and if it was listed, all necessary procedures were compiled for the delisting of the shares in accordance with the applicable e-laws, as prescribed by the Securities Exchange Board of India (SEBI).

Procedure for conversion of a public limited company to a private limited company

The first step is to hold a meeting of the Board of Directors (BOD) of the company for the following purposes:

• For considering the reason for conversion and suitable alterations in the Memorandum of Association (MOA) and Articles of Association (AOA) of the company reflecting the changes arising due to conversion;
• To provide authorization for filing the necessary application for conversion with the adjudicating authority.

The next step is to hold a general meeting of shareholders of the company to obtain their consent to the said conversion and the necessary alterations in the MOA and AOA by means of passing a special resolution.

To fill out the prescribed e-form with the Registrar of Companies (“ROC”) within 30 days of the passing of the aforesaid special resolution.

To file an application for conversion to the adjudicating authority within 60 days from the date of passing a special resolution in the General Meeting of Shareholders. However, before proceeding with the filing of the application, the company must, at least 21 days before the date of filing the application with RD, advertise notice of conversion in both English and other regional newspapers widely circulating in the state wherein the registered office of the company is situated.

The company must serve individual notice of conversion to each of its creditors by registered post. Further, the company must also serve individual notice of the conversion to both the RD and ROC or any other authority which regulates the company by registered post.

Post the necessary publications and serving of notice of conversion, the company shall, within 60 days, file the application for conversion with the Regional Directorate (“RD”) in the prescribed e-form, from the date of passing the special resolution, along with the following documents:

• The draft copy of the altered MoA and AoA of the company and a copy of the Minutes of the General Meeting of Shareholders wherein the said conversion was approved by the Shareholders;
• Copy of the board resolution giving the authorization to file such an application with RD;
• Prescribed declarations from Directors/KMP (key management personnel) of the Company with respect to restriction of the total number of members to 200, non-acceptance of deposits in violation of the law, and various other matters as elucidated under the relevant section of the Act;
• A list of creditors drawn not older than 30 days from the date of filing the application is supported by an affidavit that duly verifies the said list.

If no objections are received, then the RD shall pass an order duly approving the application within 30 days from the date when the application was received.

On receipt of the order, the same is to be filed with the ROC in the prescribed e-form within 15 days from the date of the order. ROC will then close the former registration and issue a fresh certificate of incorporation, thereby evidencing the conversion from a Public Limited Company to a Private Limited Company.

The company has to now apply for conversion in the database of all tax authorities i.e. PAN/TAN, and all other registrations. The company has to ensure that the letterheads, invoices, name plates, and/or any other correspondences are amended or altered and undertake the necessary updation of bank records.

The Companies Act of 2013 plays a very important role in keeping different kinds of companies in check and making sure they follow the rules. This law isn’t just good for the companies themselves but also for their workers, customers, and society overall. This defined scope ultimately helps the end-users, as the companies have a legal framework under which they are bound to work. Hence, these companies remain under a certain boundary wall, and hence they don’t misuse their power. Thus, it helps in many ways, as the employees get protected in terms of their labour rights, the end-users get good-quality products, and society as a whole faces comparatively less company-related fraudulent issues because the law has it all in its hands. 

The Companies Act of 2013, replacing the Company Law of 1956, has given wonderful amendments which have improved the “quality of this law” to a great level. The Act also improves women’s employment in the corporate sector. It stipulates that certain classes of companies spend a certain amount of money every year on activities or initiatives that reflect corporate social responsibility. It has introduced the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCALT) in order to replace the company law board for industrial and financial reconstruction. Such tribunals relieve the courts of their burden and simultaneously provide specialised justice. However, it is important to consider the pros and cons of each type of company before deciding which one best fits business goals and circumstances.

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• https://companykayda.com/subsidiary-company-definition/
• https://taxguru.in/company-law/government-company-companies-act-2013.html
• https://cleartax.in/s/one-person-company-registration-procedure-india
• https://cleartax.in/s/foreign-company-india-registration
• https://taxguru.in/company-law/foreign-companies-companies-act-2013.html
• https://taxguru.in/company-law/rules-regulations-section-8-company.html
• https://taxguru.in/company-law/section-8-companies-under-companies-act-2013.html
• https://blog.ipleaders.in/section-8-of-companies-act-2013/
• https://investguiding-com.custommapposter.com/article/what-are-the-disadvantages-of-a-public-company

Referred books

• Avtar Singh, Company Law, 15th Edition, Easter Book Company.

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Assignment of Lease: How It Works and Parties Involved

Jump to section, what is an assignment of lease.

The assignment of lease is a title document that transfers all rights possessed by a lessee or tenant to a property to another party. The assignee takes the assignor’s place in the landlord-tenant relationship.

You can view an example of a lease assignment here .

How Lease Assignment Works

In cases where a tenant wants to or needs to get out of their lease before it expires, lease assignment provides a legal option to assign or transfer rights of the lease to someone else. For instance, if in a commercial lease a business leases a place for 12 months but the business moves or shuts down after 10 months, the person can transfer the lease to someone else through an assignment of the lease. In this case, they will not have to pay rent for the last two months as the new assigned tenant will be responsible for that.

However, before the original tenant can be released of any responsibilities associated with the lease, other requirements need to be satisfied. The landlord needs to consent to the lease transfer through a “License to Assign” document. It is crucial to complete this document before moving on to the assignment of lease as the landlord may refuse to approve the assignment.

Difference Between Assignment of Lease and Subletting

A transfer of the remaining interest in a lease, also known as assignment, is possible when implied rights to assign exist. Some leases do not allow assignment or sharing of possessions or property under a lease. An assignment ensures the complete transfer of the rights to the property from one tenant to another.

The assignor is no longer responsible for rent or utilities and other costs that they might have had under the lease. Here, the assignee becomes the tenant and takes over all responsibilities such as rent. However, unless the assignee is released of all liabilities by the landlord, they remain responsible if the new tenant defaults.

A sublease is a new lease agreement between the tenant (or the sublessor) and a third-party (or the sublessee) for a portion of the lease. The original lease agreement between the landlord and the sublessor (or original tenant) still remains in place. The original tenant still remains responsible for all duties set under the lease.

Here are some key differences between subletting and assigning a lease:

• Under a sublease, the original lease agreement still remains in place.
• The original tenant retains all responsibilities under a sublease agreement.
• A sublease can be for less than all of the property, such as for a room, general area, portion of the leased premises, etc.
• Subleasing can be for a portion of the lease term. For instance, a tenant can sublease the property for a month and then retain it after the third-party completes their month-long sublet.
• Since the sublease agreement is between the tenant and the third-party, rent is often negotiable, based on the term of the sublease and other circumstances.
• The third-party in a sublease agreement does not have a direct relationship with the landlord.
• The subtenant will need to seek consent of both the tenant and the landlord to make any repairs or changes to the property during their sublease.

Here is more on an assignment of lease here .

Parties Involved in Lease Assignment

There are three parties involved in a lease assignment – the landlord or owner of the property, the assignor and the assignee. The original lease agreement is between the landlord and the tenant, or the assignor. The lease agreement outlines the duties and responsibilities of both parties when it comes to renting the property. Now, when the tenant decides to assign the lease to a third-party, the third-party is known as the assignee. The assignee takes on the responsibilities laid under the original lease agreement between the assignor and the landlord. The landlord must consent to the assignment of the lease prior to the assignment.

For example, Jake is renting a commercial property for his business from Paul for two years beginning January 2013 up until January 2015. In January 2014, Jake suffers a financial crisis and has to close down his business to move to a different city. Jake doesn’t want to continue paying rent on the property as he will not be using it for a year left of the lease. Jake’s friend, John would soon be turning his digital business into a brick-and-mortar store. John has been looking for a space to kick start his venture. Jake can assign his space for the rest of the lease term to John through an assignment of lease. Jake will need to seek the approval of his landlord and then begin the assignment process. Here, Jake will be the assignor who transfers all his lease related duties and responsibilities to John, who will be the assignee.

You can read more on lease agreements here .

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Assignment of Lease From Seller to Buyer

In case of a residential property, a landlord can assign his leases to the new buyer of the building. The landlord will assign the right to collect rent to the buyer. This will allow the buyer to collect any and all rent from existing tenants in that property. This assignment can also include the assignment of security deposits, if the parties agree to it. This type of assignment provides protection to the buyer so they can collect rent on the property.

The assignment of a lease from the seller to a buyer also requires that all tenants are made aware of the sale of the property. The buyer-seller should give proper notice to the tenants along with a notice of assignment of lease signed by both the buyer and the seller. Tenants should also be informed about the contact information of the new landlord and the payment methods to be used to pay rent to the new landlord.

You can read more on buyer-seller lease assignments here .

Get Help with an Assignment of Lease

Do you have any questions about a lease assignment and want to speak to an expert? Post a project today on ContractsCounsel and receive bids from real estate lawyers who specialize in lease assignment.

ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.

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Christian Davila received his Juris Doctorate from St. Mary’s University and becoming a member of the State Bar of Texas in 2013. Before law school, he studied at Texas A&M International University (TAMIU), and participated in multiple programs across various fields of study, including the University of Texas Medical Branch-School of Medicine’s “Early Medical School Acceptance Program,” and the Hispanic Association of Colleges & Universities’ “National Internship Program” at the Library of Congress in Washington, D.C. Christian’s legal experience includes criminal law (both prosecution and defense), family law, transactional law, business litigation, real estate litigation, and general civil litigation. Christian was previously in-house counsel for a multi-million dollar apartment construction and management company, handling all property acquisition, document drafting, negotiations, and litigation. Christian is a former member of the American Association for Justice (formerly the Association of Trial Lawyers of America), and he has been distinguished by the National Trial Lawyers as one of their TOP 40 Civil Plaintiff attorneys in Texas UNDER 40 years old. He likes weightlifting, reading comicbooks, and being silly with his kids in his spare time.

I opened Hestia Legal when I was 6 months pregnant with the focus on educating and assisting families in my community. While the majority of my practice revolves around Estate Planning, I have a history of experience with contract and general business agreement drafting, discovery drafting, and general litigation document drafting.

I am a licensed attorney in Illinois, I am currently a Regulatory Compliance Analyst.

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Assignment of Lease

Contract to lease land from a church?

I’m planning on leasing land from a church. Putting a gym on the property. And leasing it back to the school.

Ok; first step is that you will need a leasing contract with the church. Ask them to prepare one for you so you would just need an attorney to review the agreement and that should cost less than if you had to be the party to pay a lawyer to draft it from scratch. You need to ensure that the purpose of the lease is clearly stated - that you plan to put a gym on the land so that there are no issues if the church leadership changes. Step 2 - you will need a lease agreement with the school that your leasing it do (hopefully one that is similar to the original one your received from the church). Again, please ensure that all the terms that you discuss and agree to are in the document; including length of time, price and how to resolve disputes if you have one. I hope this is helpful. If you would like me to assist you further, you can contact me on Contracts Counsel and we can discuss a fee for my services. Regards, Donya Ramsay (Gordon)

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Home » Blog » What is a Company?- Definition, Characteristics and Latest Case Laws

What is a Company?- Definition, Characteristics and Latest Case Laws

• Blog | Company Law |
• 22 Min Read
• Last Updated on 6 September, 2023

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Table of Contents

• What is a company?
• Definition of a company
• Characteristic features of a company
• Lifting the corporate veil

1. What is a company?

The word ‘company’ has no strictly technical or legal meaning ( Stanley, Re [1906] 1 Ch. 131). It may be described to imply an association of persons for some common object or objects. The purposes for which people may associate themselves are multifarious and include economic as well as non-economic objectives. But, in common parlance, the word ‘company’ is normally reserved for those associated for economic purposes, i.e., to carry on a business for gain.

Used in the aforesaid sense, the word ‘company’, in simple terms, may be described to mean a voluntary association of persons who have come together for carrying on some business and sharing the profits therefrom.

Indian Law provides two main types of organisations for such associations:

• ‘partnership’ and

Although the word ‘company’ is colloquially applied to both, the statute regards companies and company law as distinct from partnerships and partnership law. Partnership Law in India is codified in the Partnership Act, 1932 and Limited Liability Partnership Act, 2008. Both these legislations are based on the law of agency, each partner becoming an agent of the other(s), and it, therefore, affords a suitable framework for an association of a small body of persons having trust and confidence in each other.

A more complicated form of association, with a large and fluctuating membership, requires a more elaborate organisation which ideally should confer corporate personality on the association, that is, should recognise that it constitutes a distinct legal person, subject to legal duties and entitled to legal rights separate from those of its members. This can be obtained easily and cheaply by registering an association as a company under the Act.

It should be noted that the Act even allows a company to be formed and registered for the promotion of commerce, art, science, sports, religion or charity, etc., for purposes other than profit making.

In this article, we shall limit our scope of study only to companies registered under the Companies Act, 2013 or under any of the earlier Companies Acts.

Dive Deeper: [FAQs] on Company Conversion Types – Private | Public | Section 8 | OPC | LLP Basic Primer on Limited Liability Partnership (LLP) vs. Private Limited Company

2. Definition of a company

The Act does not define a company in terms of its features.

Section 2( 20 ) of the Companies Act, 2013 defines a company to mean a company incorporated under this Act or under any previous company law.

This definition does not clearly point out the meaning of a company. In order to understand the meaning of a company, let us see the definitions as given by some authorities.

Some popular definitions of a company

Lord Justice Lindley – “A company is an association of many persons who contribute money or monies worth to a common stock and employed in some trade or business and who share the profit and loss arising therefrom. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute to it or to whom it pertains are members. The proportion of capital to which each member is entitled is his share. The shares are always transferable although the right to transfer is often more or less restricted.” Chief Justice Marshall – “A corporation is an artificial being, invisible, intangible, existing only in contemplation of the law. Being a mere creation of law, it possesses only the properties which the Charter of its creation confers upon it, either expressly or as incidental to its very existence.” Prof. Haney – “A company is an artificial person created by law, having separate entity, with a perpetual succession and common seal.”

The above definitions clearly bring out the meaning of a company in terms of its features. A company to which the Companies Act applies comes into existence only when it is registered under the Act. On registration, a company becomes a body corporate i.e., it acquires a legal personality of its own, separate and distinct from its members. A registered company is, therefore, created by law and law alone can regulate, modify or dissolve it.

In G.V. Pratap Reddy Through G.P.A. TSR Research (P.) Ltd. v. K.V.V.S.N. Associates [2016] 70 taxmann.com 34 (SC), the Supreme Court of India held that where notice inviting tender (NIT) by State of Telangana required that bidder must be an individual/company, word company in NIT could only mean a company as understood under Companies Act and cannot be read to include a firm and, therefore, bid of respondent which was neither an individual nor a company but a firm was rightly rejected by State.

3. Characteristic features of a company

The most important characteristic features of a company are ‘separate legal entity’ of the company and in most cases ‘limited liability’ of its members. These and other characteristic features of a company are discussed below:—

3.1 Incorporated association

A company must be incorporated or registered under the Companies Act. Minimum number of members required for this purpose is seven in the case of a ‘public company’ and two in the case of a ‘private company’.

However, Section 3 of the Companies Act, 2013 allows formation of ‘One Person Company’ also.

3.2 Legal entity distinct from its members

Unlike partnership*, the company is distinct from the persons who constitute it. Hence, it is capable of enjoying rights and of being subjected to duties which are not the same as those enjoyed or borne by its members.

As Lord Macnaughten puts it, “the company is at law a different person altogether from the subscribers. . . . ; and though it may be that after incorporation the business is precisely the same as it was before and the same persons are managers and the same hands receive the proceeds, the company is not in law, the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act.” [Salomon’s case]

Case Law: Kondoli Tea Co. Ltd. , Re ILR [1886]

The first case on the subject (even before the famous Salomon’s case) was that of Kondoli Tea Co. Ltd. , Re ILR [1886].

Facts of the Case:

In this case certain persons transferred a tea estate to a company and claimed exemption from ad valorem duty on the ground that they themselves were the shareholders in the company and, therefore, it was nothing but a transfer from them in one to themselves under another name.

Rejecting this, the Calcutta High Court observed: “The Company was a separate person; a separate body altogether from the shareholders and the transfer was as much a conveyance, a transfer of the property, as if the shareholders had been totally different persons.”

The separate legal personality of the company is the bedrock of the Company Law …… – S.A.E. (India) Ltd. v. E.I.D. Parry (India) Ltd. [1998] 18 SCL 481 (Mad.).

Thus, a company can own property and deal with it the way it pleases. No member can either individually or jointly claim any ownership rights in the assets of the company during its existence or on its winding-up – B.F. Guzdar v. CIT, Bombay [1955] 25 Comp. Cas. 1 (SC).

In Rajendra Nath Dutta v. Shibendra Nath Mukherjee [1982] 52 Comp. Cas. 293 (Cal.) it was held that for any wrong done, the company must sue or be sued in its own name.

Even where a single shareholder virtually holds the entire share capital, a company is to be differentiated from such a shareholder.

Case Law: Salomon v. Salomon & Co. Ltd. [1895-99] All ER 33 (HL)

In the well known case of Salomon v. Salomon & Co. Ltd. [1895-99] All ER 33 (HL), Salomon was a prosperous leather merchant. He converted his business into a Limited Company— Salomon & Co. Ltd. The company so formed consisted of Salomon, his wife and five of his children as members. The company purchased the business of Salomon for £39,000, the purchase consideration was paid in terms of £10,000 debenture conferring a charge over the company’s assets, £20,000 in fully paid £1 share each and the balance in cash. The company in less than one year ran into difficulties and liquidation proceedings commenced. The assets of the company were not even sufficient to discharge the debentures (held entirely by Salomon himself). And nothing was left for the unsecured creditors.

The House of Lords unanimously held that the company had been validly constituted, since the Act only required seven members holding at least one share each. It said nothing about their being independent, or that there should be anything like a balance of power in the constitution of the company. Hence, the business belonged to the company and not to Salomon. Salomon was its agent. The company was not the agent of Salomon.

Case Law: Lee v. Lee’s Air Farming Ltd. [1960] 3 All ER 420 (PC)

‘L’ formed a company with a share capital of three thousand pounds, of which 2999 pounds were held by ‘L’. He was also the sole governing director. In his capacity as the controlling shareholder, ‘L’ exercised full and unrestricted control over the affairs of the company. ‘L’ was a qualified pilot also and was appointed as the chief pilot of the company under the articles and drew a salary for the same. While piloting the company’s plane he was killed in an accident. As the workers of the company were insured, workers were entitled for compensation on death or injury. The question was while holding the position of sole governing director, could ‘L’ also be an employee/worker of the company.

Held that the mere fact that someone was the director of the company was no impediment to his entering into a contract to serve the company. If the company was a legal entity, there was no reason to change the validity of any contractual obligations which were created between the company and the deceased. The contract could not be avoided merely because ‘L’ was the agent of the company in its negotiations. Accordingly, ‘L’ was an employee of the company and, therefore, entitled to compensation claim.

Where a decree has been issued by the Court in respect of sums due against a company, the same cannot be enforced against its managing director – In H.S. Sidana v. Rajesh Enterprises [1993] 77 Comp. Cas. 251 (P&H).

Case Law: Bacha F. Guzdar v. The Commissioner of Income-Tax, Bombay (1955)

Mrs. Guzdar received certain amounts as dividend in respect of shares held by her in a tea company. Under the Income-Tax Act, agricultural income is exempt from payment of income-tax. As income of a tea company is partly agricultural, only 40% of the company’s income is treated as income from manufacture and sale and, therefore, liable to tax. Mrs. Guzdar claimed that the dividend income in her hands should be treated as agricultural income up to 60%, as in the case of a tea company, on the ground that the dividends received by shareholders represented the income of the company.

The Supreme Court held that though the income in the hands of the company was partly agricultural yet the same income when received by Mrs. Guzdar as dividend could not be regarded as agricultural income.

In Chamundeeswari v. CTO, Vellore Rural (2007), Madras High Court held that a company being a legal entity by itself, any dues from company have to be recovered from company and not from its directors.

3.3 Artificial person

The company, though a juristic person, does not possess the body of a natural being. It exists only in contemplation of law. Being an artificial person, it has to depend upon natural persons, namely, the directors, officers, shareholders etc., for getting its various works done. However, these individuals only represent the company and accordingly whatever they do within the scope of the authority conferred upon them and in the name and on behalf of the company, they bind the company and not themselves.

3.4 Limited liability

One of the principal advantages of trading through the medium of a limited company is that the members of the company are only liable to contribute towards payment of its debts to a limited extent.

If the company is limited by shares, the shareholder’s liability to contribute is measured by the nominal value of the shares he holds, so that once he or someone who held the shares previously has paid that nominal value plus any premium agreed on when the shares were issued, he is no longer liable to contribute anything further. However, companies may be formed with unlimited liability of members or members may guarantee a particular amount. In such cases, liability of the members shall not be limited to the nominal or face value of their shares and the premium, if any, unpaid thereon.

In the case of unlimited liability companies, members shall continue to be liable till each paisa has been paid off.

In case of companies limited by guarantee, the liability of each member shall be determined by the guarantee amount, i.e., he shall be liable to contribute up to the amount guaranteed by him.

If the guarantee company also has share capital, the liability of each member shall be determined in terms of not only the amount guaranteed but also the amount remaining unpaid on the shares held by a member.

Unlimited Liability of a member of a Limited Liability company

Section 3A, inserted by the Companies (Amendment) Act, 2017, provides that if at any time the number of members of a company is reduced, in the case of a public company, below seven and in the case of a private company, below two, and the company carries on business for more than six months while the number of members is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is aware of the fact that it is carrying on business with less than seven members or two members, as the case may be, shall be severally liable for the payment of the whole debt.

3.5 Separate property

Shareholders are not, in the eyes of the law, part owners of the undertaking. In India, this principle of separate property was best laid down by the Supreme Court in Bacha F. Guzdar v. CIT, Bombay (supra). The Supreme Court held that a shareholder is not the part owner of the company or its property, he is only given certain rights by law, for example, to vote or attend meetings, or to receive dividends.

Case Law: Macaura v. Northern Assurance Company Ltd. [1925] AC 619

In this case, Macaura held all except one share of a timber company. He had also advanced substantial amount to the company. He insured the company’s timber in his own name. On timber being destroyed by fire, his claim was rejected for want of insurable interest.

The court observed “No shareholder has any right to any item of property owned by the company for he has no legal or equitable interest therein”.

“. . . the property of the company is not the property of the shareholders; it is the property of the company” – Gramophone & Typewriter Ltd. v. Stanley ( supra ).

3.6 Transferability of shares

One particular reason for the popularity of joint stock companies has been that their shares are capable of being easily transferred. The Act in section 44 echoes this feature by declaring:

“the shares, debentures or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the company”.

A shareholder can transfer his shares to any person without the consent of other members. Articles of association, even of a public company can put certain restrictions on the transfer of shares but it cannot altogether stop it.

The Companies Act, 2013 even upholds shareholders’ agreements providing for ‘Right of first offer’ and ‘Right of first refusal’ as valid even in case of a public company. What it means is that Articles of a company, whether public or private, may contain a clause that in case a member wishes to sell his shares, he will have to first offer the same to existing members. Only if they refuse to buy within the stipulated period that they can be sold to the outsiders.

However, a private company is required to put certain restrictions on the transferability of its shares but the right to transfer is not taken away absolutely even in case of a private company.

3.7 Perpetual succession

Company being an artificial person cannot be incapacitated by illness and it does not have an allotted span of life. Being distinct from the members, the death, insolvency or retirement of its members leaves the company unaffected. Members may come and go but the company can go for ever. It continues even if all its human members are dead. Even where during the war all the members of a private company, while in general meeting were killed by a bomb, the company survived. Not even a hydrogen bomb could have destroyed it. [ K/9 Meat Suppliers (Guildford) Ltd., Re [1966] 1 W.L.R. 1112]. “King is dead, long live the King” very aptly applies to the company form of organisation. [Here, the first ‘King’ is used to refer to the individual monarch and the second ‘King’ refers to the office of king, i.e. , the institution of monarchy.] In the above circumstances, the legal heirs of the deceased shareholders will become the members.

3.8 Common seal*

A company being an artificial person is not bestowed with a body of a natural being. Therefore, it does not have a mind or limbs of human being. It has to work through the agency of human beings, namely, the directors and other officers and employees of the company.

As per section 22, as amended by the Companies (Amendment) Act, 2015, a company may, under its common seal, if any, through general or special power of attorney empower any person to execute deeds on its behalf in any place either in or outside India. It further provides that a deed signed by such an attorney on behalf of the company and under his seal where sealing is required, shall bind the company.

In case a company does not have a common seal, the authorization shall be made by two directors or by a director and the company secretary, wherever the company has appointed a company secretary.

Again, except where expressly otherwise provided in this Act, a document or proceeding requiring authentication by a company may be signed by any key managerial personnel or an officer or employee of the company duly authorized by the Board in this behalf, and need not be under its common seal [Section 21]

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4. Lifting the corporate veil

The chief advantage of incorporation from which all others follow is, of course, the separate legal entity of the company. However, it may happen that the corporate personality of the company is used to commit frauds or improper or illegal acts. Since an artificial person is not capable of doing anything illegal or fraudulent, the facade of corporate personality might have to be removed to identify the persons who are really guilty. This is known as ‘lifting the corporate veil’. Although, in general, the courts do not interfere and essentially go by the principle of separate entity as laid down in the Salomon’s case and endorsed in many others, it may be in the interest of the members in general or in public interest to identify and punish the persons who misuse the medium of corporate personality.

In Cotton Corporation of India Ltd. v. G.C. Odusumathd [1999] 22 SCL 228 (Kar.), the Karnataka High Court has held that the lifting of the corporate veil of a company as a rule is not permissible in law unless otherwise provided by clear words of the Statute or by very compelling reasons such as where fraud is needed to be prevented or trading with enemy company is sought to be defeated.

As to when the corporate veil shall be lifted, the observations of the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp. Cas. 548 (SC) is worth noting.

“While it is firmly established ever since in Salomon v. Salomon & Co. Ltd. [1897] AC 22 that a company is an independent and legal personality distinct from the individuals who are its members, it has since been held that the corporate veil may be lifted, the corporate personality may be ignored and the individual members recognised for who they are in certain exceptional circumstances. Generally, and broadly speaking the corporate veil may be lifted where the statute itself contemplates lifting the veil or fraud or improper conduct is intended to be prevented, or a taxing statute or a beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be, in reality, part of one concern.”

It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of public interest, the effect on parties who may be affected, etc.

Again, in State of U.P. v. Renusagar Power Co. [1991] 70 Comp. Cas. 127, the Supreme Court observed :

“The concept of lifting the corporate veil is a changing concept. The veil of corporate personality, even though not lifted sometimes, is becoming more and more transparent in modern jurisprudence. It is high time to reiterate that, in the expanding horizon of modern jurisprudence, lifting of the corporate veil is permissible, its frontiers are unlimited. But it must depend primarily on the realities of the situation.”

The circumstances under which the courts may lift the corporate veil may broadly be grouped under the following two heads:—

(A) Under statutory provisions

(B) Under judicial interpretations

4.1 Under statutory provisions

The veil of corporate personality may be lifted in certain cases or pierced as per express provisions of the Act. In other words, the advantage of ‘distinct entity’ and ‘limited liability’ may not be allowed to be enjoyed in certain circumstances. Such cases are :

The Companies Act, 2013 itself provides for certain cases in which the directors or members of the company may be held personally liable. In such cases, while the separate entity of the company is maintained, the directors or members are held personally liable along with the company. These cases are as follows:

4.1(A) Mis-statements in prospectus [Sections 34 & 35] – In case of misrepresentation in a prospectus, the company and every director, promoter, expert and every other person, who authorised such issue of prospectus shall be liable to compensate the loss or damage to every person who subscribed for shares on the faith of untrue statement (Sec. 35).

Besides, these persons may be punished with imprisonment for a term which shall not be less than six months but which may extend to ten 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 (Section 34 and Section 447 read together). However, a person may escape the aforesaid conviction if he proves that such statement or omission was immaterial or that he had reasonable grounds to believe, and did up to the time of issue of the prospectus believe, that the statement was true or the inclusion or omission was necessary.

4.1(B) Failure to return application money [Sec. 39] – In case of issue of shares by a company to the public, if minimum subscription, as stated in the prospectus has not been received within 30 days of the issue of prospectus or such other period as may be specified by the SEBI, then as per Rule 11 of Companies (Prospectus and Allotment of Securities) Rules, 2014, the application money shall be repaid within a period of fifteen days from the closure of the issue and if any such money is not so repaid within such period, the directors of the company who are officers in default shall jointly and severally be liable to repay that money with interest at the rate of fifteen percent per annum.

In case of default, the company and its officer who is in default shall be liable to a penalty of one thousand rupees for each day during which such default continues or one lakh rupees, whichever is less.

4.1(C) Misdescription of Name [Sec. 12] – As per section 12, a company shall have its name printed on hundies, promissory notes, bills of exchange and such other documents as may be prescribed. Thus, where an officer of a company signs on behalf of the company any contract, bill of exchange, hundi, promissory note, cheque or order for money, such person shall be personally liable to the holder if the name of the company is either not mentioned, or is not properly mentioned.

Case Law: Hendon v. Adelman (1973)

On a cheque, the name of a company was stated as ‘LR agencies limited’ whereas the real name of the company was ‘L&R Agencies Ltd.’

The Court held the signatory directors personally liable.

Besides, the company and its officer who is in default shall be liable to a penalty of one thousand rupees for each day during which such default continues or one lakh rupees, whichever is less.

4.1(D) Punishment for contravention of section 73 or section 76 [Section 76A] – Where a company accepts or invites or allows or causes any other person to accept or invite on its behalf any deposit in contravention of the manner or the conditions prescribed under section 73 or section 76 or rules made thereunder or if a company fails to repay the deposit or part thereof or any interest due thereon within the time specified under section 73 or section 76 or rules made thereunder or such further time as may be allowed by the Tribunal under section 73, besides the company that shall be punishable with fine which shall not be less than one crore rupees but which may extend to ten crore rupees; every officer of the company who is in default shall be punishable with imprisonment which may extend to seven years or with fine which shall not be less than twenty-five lakh rupees but which may extend to two crore rupees, or with both. Moreover, if it is proved that the officer of the company who is in default, has contravened such provisions knowingly or wilfully with the intention to deceive the company or its shareholders or depositors or creditors or tax authorities, he shall also be liable for action under section 447.

4.1(E) For facilitating the task of an inspector appointed under section 210 or 212 or 213 to investigate the affairs of the company [Sec. 219] – Section 219 provides that if an inspector appointed under section 210 or section 212 or section 213 to investigate into the affairs of a company considers it necessary for the purposes of the investigation, to investigate also the affairs of—

( a ) any other body corporate which is, or has at any relevant time been the company’s subsidiary company or holding company, or a subsidiary company of its holding company;

( b ) any other body corporate which is, or has at any relevant time been managed by any person as managing director or as manager, who is, or was, at the relevant time, the managing director or the manager of the company;

( c ) any other body corporate whose Board of Directors comprises nominees of the company or is accustomed to act in accordance with the directions or instructions of the company or any of its directors; or

( d ) any person who is or has at any relevant time been the company’s managing director or manager or employee,

he shall, subject to the prior approval of the Central Government, investigate into and report on the affairs of the other body corporate or of the managing director or manager, in so far as he considers that the results of his investigation are relevant to the investigation of the affairs of the company for which he is appointed.

4.1(F) For investigation of ownership of company [Sec. 216] – Under section 216, the Central Government may appoint one or more inspectors to investigate and report on the membership of any company for the purpose of determining the true persons who are financially interested in the company and who control its policy or materially influence it.

4.1(G) Fraudulent conduct [Sec. 3391] – Where in the case of winding-up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or any other person, or for any fraudulent purpose, those who are knowingly parties to such conduct of business may, if the Tribunal thinks it proper so to do, be made personally liable without any limitation as to liability for all or any debts or other liabilities of the company. Liability under this section2 may be imposed only if it is proved that the business of the company has been carried on with a view to defraud the creditors – Re. Augustus Barnett & Sons Ltd. [1986] B CLC 170 Ch. D.

4.1(H) Liability for ultra vires Acts – Directors and other officers of a company will be personally liable for all those acts which they have done on behalf of a company if the same are ultra vires the company.

Case Law: Weeks v. Propert [1873] L.R 8 C.P. 427

The directors of a railway company which had fully exhausted its borrowing powers advertised for money to be lent on the security of debentures, ‘W’ lent £500 upon the faith of advertisement and received a debenture.

Held, the debenture was void but ‘W’ could sue the directors for breach of warranty of authority (since they had by advertisement warranted that they had the power to borrow which in fact they did not have).

4.1(I) Liability under other statutes – Besides the Act, directors and other officers of the company may be held personally liable under the provisions of other statutes. For example, under the Income-tax Act, where any private company is wound-up and if tax arrears of the company in respect of any income of any previous year cannot be recovered, every person who was director of that company at any time during the relevant previous year shall be jointly and severally liable for payment of tax. Similarly, under Foreign Exchange Management Act, 1999, the directors and other officers may be proceeded individually or jointly for violations of the Act.

4.2 Under Judicial Interpretations

It is difficult to deal with all the cases in which courts have lifted or might lift the corporate veil. Some of the cases where the veil of incorporation was lifted by judicial decisions may be discussed to form an idea as to the kind of circumstances under which the facade of corporate personality will be removed or the persons behind the corporate entity identified and penalised, if necessary.

4.2(A) Protection of revenue – The separate entity of a company may be disregarded where revenue of the State is at stake.

Case Law: Sir Dinshaw Maneckjee Petit, Re AIR 1927 Bom. 371

Facts of the case:

The assessee, in this case was a millionaire earning huge income by way of dividend and interest. He formed four private companies and transferred his investments to each of these companies in exchange of their shares. The dividends and interest income received by the company was handed back to Sir Dinshaw as a pretended loan.

It was held that the company was formed by the assessee purely and simply as a means of avoiding tax and company was nothing more than assessee himself. It did no business, but was created simply as a legal entity to ostensibly receive the dividends and interest and to hand them over to the assessee as pretended loans.

Similarly in CIT v. Sri Meenakshi Mills Ltd. AIR 1967 SC 819, where the veil had been used for evasion of taxes and duties, the court upheld the piercing of the veil to look at the real transaction.

4.2(B) Prevention of fraud or improper conduct – Where the medium of a company has been used for committing fraud or improper conduct, courts have lifted the veil and looked at the realities of the situation.

Case Law: Gilford Motor Company v. Horne [1933] 1 CH 935

‘Horne’ had been employed by the company under an agreement that he shall not solicit the customers of the company or compete with it for a certain period of time after leaving its employment. After ceasing to be employed by the plaintiff, Horne formed a Company which carried on a competing business and caused the whole of its shares to be allotted to his wife and an employee of the company, who were appointed to be its directors.

It was held that since the defendant (Horne) in fact controlled the company, its formation was a mere ‘cloak or sham’ to enable him to break his agreement with the plaintiff. Accordingly, an injunction was issued against him and against the company he had formed restraining them from soliciting the plaintiff’s customers.

Case law: Jones v. Lipman [1962] 1 All ER 442

Seller of a piece of land sought to evade specific performance of a contract for the sale of the land by conveying the land to a company which he formed for the purpose. Initially the company was formed by third parties, and the vendor purchased the whole of its shares from them, had the shares registered in the name of himself and a nominee, and had himself and the nominee appointed directors.

It was held that specific performance of the contract cannot be resisted by the vendor by conveyancing of the land to the company which was a mere ‘facade’ for avoidance of the contract of sale and specific performance of the contract was therefore ordered against the vendor and the company.

4.2(C) Determination of the enemy character of a company – Company being an artificial person cannot be an enemy or friend. However, during war, it may become necessary to lift the corporate veil and see the persons behind as to whether they are enemies or friends. It is because, though a company enjoys a distinct entity, its affairs are essentially run by individuals.

Case Law: Daimler Company Ltd. v. Continental Tyre & Rubber Co. (Great Britain) Ltd. [1916] 2 AC 307

A company was incorporated in London by a German company for the purpose of selling tyres manufactured in Germany. Its majority shareholders and all the directors were Germans. War between England and Germany was declared in 1914.

It was held that since both the decision-making bodies, the Board of directors and the general body of shareholders were controlled by Germans, the company was a German company and hence an enemy company. Accordingly, the suit filed by the company to recover a trade debt was dismissed on the ground that such payment would amount to trading with enemy.

4.2(D) Formation of subsidiaries to act as an agent –

Case Law: Merchandise Transport Limited v. British Transport Commission [1982] 2 QB 173

A transport company wanted to obtain licences for its vehicles, but it could not do so if it made the application in its own name. It, therefore, formed a subsidiary company and the application for licences was made in the name of the subsidiary. The vehicles were to be transferred to the subsidiary.

Held , the parent and the subsidiary company were one commercial unit and the application for licences was rejected.

Similarly, in the State of U.P. v. Renusagar Power Co. [1991] 70 Comp. Cas. 127, the Supreme Court held that where the holding company holds 100% shares in a subsidiary company and the latter is created only for the purpose of the holding company, corporate veil can be lifted.

The mere fact that the holding company has a subsidiary company does not imply that whenever claims are made against the subsidiary company, the corporate veil is to be pierced in order to make the holding company liable for the debts incurred by the subsidiary company. The normal rule is that independent legal personality of the company

Dive Deeper: Registration and Characteristics of Companies What is Companies Act, 2013? Different Types of Companies

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Synonyms of assignment

• as in lesson
• as in appointment
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Thesaurus Definition of assignment

Synonyms & Similar Words

• responsibility
• undertaking
• requirement
• designation
• appointment
• authorization
• installment
• installation
• destination
• emplacement
• investiture
• singling (out)

Antonyms & Near Antonyms

• dethronement

Synonym Chooser

How does the noun assignment contrast with its synonyms?

Some common synonyms of assignment are chore , duty , job , stint , and task . While all these words mean "a piece of work to be done," assignment implies a definite limited task assigned by one in authority.

When is it sensible to use chore instead of assignment ?

While the synonyms chore and assignment are close in meaning, chore implies a minor routine activity necessary for maintaining a household or farm.

When is duty a more appropriate choice than assignment ?

Although the words duty and assignment have much in common, duty implies an obligation to perform or responsibility for performance.

When might job be a better fit than assignment ?

The synonyms job and assignment are sometimes interchangeable, but job applies to a piece of work voluntarily performed; it may sometimes suggest difficulty or importance.

When could stint be used to replace assignment ?

In some situations, the words stint and assignment are roughly equivalent. However, stint implies a carefully allotted or measured quantity of assigned work or service.

When can task be used instead of assignment ?

The meanings of task and assignment largely overlap; however, task implies work imposed by a person in authority or an employer or by circumstance.

Examples of assignment in a Sentence

These examples are programmatically compiled from various online sources to illustrate current usage of the word 'assignment.' Any opinions expressed in the examples do not represent those of Merriam-Webster or its editors. Send us feedback about these examples.

Thesaurus Entries Near assignment

assignments

Cite this Entry

“Assignment.” Merriam-Webster.com Thesaurus , Merriam-Webster, https://www.merriam-webster.com/thesaurus/assignment. Accessed 4 Sep. 2024.

More from Merriam-Webster on assignment

Nglish: Translation of assignment for Spanish Speakers

Britannica English: Translation of assignment for Arabic Speakers

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Meaning of assignment in English

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• It was a plum assignment - more of a vacation really.
• He took this award-winning photograph while on assignment in the Middle East .
• His two-year assignment to the Mexico office starts in September .
• She first visited Norway on assignment for the winter Olympics ten years ago.
• He fell in love with the area after being there on assignment for National Geographic in the 1950s.
• act as something
• all work and no play (makes Jack a dull boy) idiom
• be at work idiom
• be in work idiom
• housekeeping
• in the line of duty idiom
• join duty idiom
• undertaking

You can also find related words, phrases, and synonyms in the topics:

assignment | Intermediate English

Assignment | business english, examples of assignment, collocations with assignment.

These are words often used in combination with assignment .

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Translations of assignment

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Word of the Day

put something off

to decide or arrange to delay an event or activity until a later time or date

It’s not really my thing (How to say you don’t like something)

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Definition of assignment noun from the Oxford Advanced Learner's Dictionary

• Students are required to complete all homework assignments.
• You will need to complete three written assignments per semester.
• a business/special assignment
• I had set myself a tough assignment.
• on an assignment She is in Greece on an assignment for one of the Sunday newspapers.
• on assignment one of our reporters on assignment in China
• The students handed in their assignments.
• The teacher gave us an assignment on pollution.
• Why did you take on this assignment if you're so busy?
• He refused to accept the assignment.
• assignment on

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ST. PETERSBURG, FLA. – An important three-game road series in Kansas City looms later this week, and the Twins could welcome a key member of their roster back into the lineup.

Byron Buxton started a rehab assignment with the Class AAA St. Paul Saints on Monday. He went 1-for-3 with a walk and a strikeout while playing seven innings in center field during the Saints’ 11-8 loss to the Iowa Cubs at CHS Field.

The Saints are off Tuesday, and it’s likely Buxton will play another rehab game Wednesday before potentially rejoining the Twins. Buxton has been on the 10-day injured list since Aug. 15 because of right hip inflammation.

“We’re really getting there with Buck,” Twins manager Rocco Baldelli said. “He’s been waiting to get back out there. This is good. It’s the first step, but it’s an important step. Hopefully, everything goes well and we can see him back out there with us before you know it.”

If Buxton returns for the Royals series, after the Twins play four games against the Tampa Bay Rays, it would a nice jolt for a series that carries playoff implications. The Twins and Royals entered Monday tied in the standings.

Buxton is batting .275 with 16 homers, 23 doubles, 49 RBI and 54 runs in 90 games with the Twins this season. He showed more power after the All-Star break, homering in seven of his first 18 games.

Royce wants to stay at third

Royce Lewis played three innings at second base Sunday, the first time he has played the position in his major league career, after the Twins used a pinch-hitter for Edouard Julien .

Lewis has taken some ground balls at second base during batting practice, but he doesn’t like the idea of playing an unfamiliar position during a playoff race.

“I’m terrified out there,” Lewis said, adding he didn’t want to make a mistake on covering a bunt or lining up for a relay. “Little things like that are just adding extra elements to a September push that’s important to me. I don’t know. We have plenty of really good second basemen, and I don’t want to mess up our defense just because we’re going to try something new. It’s not spring training or Triple-A for that.”

The toughest adjustment, Lewis said, is everything looks different on the other side of the infield. He would feel more comfortable playing shortstop, a position he played throughout his minor league career, but it takes time to learn how to read the ball off the bat and turn double plays from the opposite side.

“The moment you have to think in this game is when the game speeds up on you,” he said. “That’s where I’m worried I’m not ready yet.”

Related Coverage

Lewis had three balls hit in his direction Sunday, fielding each of them cleanly.

“I think we proved I’m an athlete,” Lewis said. “Now, let’s just keep playing normal baseball, play third and win baseball games.

Rodriguez promoted

Twins outfield prospect Emmanuel Rodriguez played only 37 games at Class AA Wichita because of right hand injuries this season, but he will end his season with the Saints.

Rodriguez, a 21-year-old center fielder, was promoted to St. Paul on Monday after rehabbing in Fort Myers. The lefthanded batter hit .298 in Class AA with eight homers, 12 doubles, 20 RBI and 40 runs. He drew nearly as many walks (42) as he had strikeouts (46), producing a .479 on-base percentage.

Baseball America ranks Rodriguez as the No. 2 prospect in the club’s farm system behind 2023 first-round pick Walker Jenkins .

* Max Kepler was scratched from the Twins lineup Monday with left knee soreness, the same injury that sidelined him for a few games last week.

* Manuel Margot , who was placed on the 10-day injured list Sunday, was diagnosed with a mild adductor tendon strain after he underwent a magnetic resonance imaging exam. It’s not an adductor muscle strain, which could have jeopardized the rest of his season, but he is shut down from baseball activities for at least the next five days.

Margot traveled with the Twins and received applause from Rays fans when a “Thank You Manny” tribute was played on the video board. After Margot waved to the crowd, Carlos Santana tried to push Margot out of the dugout to lengthen the ovation.

about the writer

Bobby nightengale.

Bobby Nightengale joined the Star Tribune in May, 2023, after covering the Reds for the Cincinnati Enquirer for five years. He's a graduate of Bradley University.

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