Law Insider India

Legal News, Current Trends and Legal Insight | Supreme Court of India and High Courts

Major Companies Act Landmark Judgments

9 min read
Companies Act Landmark Judgments LAW INSIDER

By Tashmayee Sarkhel

Published on July 4, 2022 at 12:30 IST

This respective article would incorporate the aspects related to the Companies Act 2006[1], Companies Act 2013[2], and the landmark judgments about them.

The Companies Act of 2013 is an Act of the Indian Parliament that governs the formation of companies, their responsibilities, their directors, and their dissolution. Whereas the Companies Act of 2006 is the primary source of company law in the United Kingdom. The Companies Act is noteworthy for several reasons, including the fact that it is the longest act in British parliamentary history, with over 700 pages and 1,300 sections.

Company – meaning, features, and types:

The law of the US defines a company as a “corporation, partnership, association, joint-stock company, trust, fund, or organized group of persons, whether incorporated or not, and (in an official capacity) any receiver, trustee in bankruptcy, or similar official, or liquidating agent, for any of the foregoing.”

The Companies Act 2013 defines a company as “a registered association which is an artificial legal person, having an independent legal, entity with a perpetual succession, a common seal for its signatures, a common capital comprised of transferable shares and carrying limited liability.”

The features of a company can be stated as,

  • Incorporated association – When a business is registered under the Companies Act, it becomes an incorporated association (or other equivalent acts under the law). To be considered a legal entity, a corporation must meet certain standards in terms of documents (MOA, AOA), shareholders, directors, and share capital.
  • Artificial Legal Person – A business is an artificial legal entity in the eyes of the law, with the ability to acquire or dispose of any property, to enter into contracts in its name, and to sue and be sued by others.
  • Separate Legal Entity – A company is a separate legal body that exists independently of its members or those who control it. A separate legal entity means that the firm is solely accountable for paying creditors and being sued for its actions. Individual members cannot be held liable for the company’s activities. Similarly, the corporation is not responsible for the members’ debts.
  • Perpetual Existence – A company is a stable business organization, unlike other non-registered business entities. Its existence is independent of its shareholders, directors, and employees. Members may come and leave, but the business exists indefinitely.
  • Common Seal – A company’s common seal (with the company’s name engraved on it) serves as a substitute for its signature because it is an artificial legal person. Any document containing the business’s common seal is legally binding on the company.
  • Limited Liability – A company’s liability might be limited either by guarantee or through shares. The responsibility of shareholders in a business limited by shares is limited to the unpaid value of their shares. In a corporation limited by guarantee, the members’ liability is restricted to the amount they committed to contribute to the business’s assets in the event it is wound up.

Coming to the types of companies, they are classified based on the requirements,

  • Classification of Companies by Mode of Incorporation
    • Royal Chartered Companies – The monarch or a king or queen creates these companies through a special charter or an order. BBC, East India Company, Bank of England, and others are examples of royally chartered businesses.
    • Statutory Companies – A special act of the federal or state legislature is required to incorporate these businesses. These businesses will handle national-level business. The Reserve Bank of India, for example, was established in 1934 under the RBI Act[3].
    • Registered or Incorporated Companies – These businesses are formed/incorporated under the government’s Companies Act. These businesses exist only if they are registered under the statute and the Registrar of Companies issues a certificate of incorporation.
  • Companies based on the liability of the members
    • Companies Limited by Shares – These businesses have a fixed share capital, and each member’s responsibility is restricted by the memorandum to the face value of the shares he has subscribed for.
    • Companies Limited by Guarantee – These corporations may or may not have a share capital, and each member’s responsibility is restricted by the memorandum to the amount of money agreed to pay in the event of the company’s dissolution for the company’s obligations and liabilities.
    • Unlimited Companies – In the event of the liquidation of an unlimited corporation, there is no statutory limit on the amount of money that the shareholder/member must pay.
  • Companies based on The Number of Members
    • Public Company or Public Limited Company – A public firm is one whose stock is available for public purchase. To put it another way, anyone can buy a public company’s stock. A public company’s membership and share transferability are both unrestricted. Other limitations apply, however:
      • A public limited company in the United Kingdom must have at least two shareholders and two directors, as well as allotted shares worth at least £50,000, be registered with Companies House, and have a competent company secretary.
      • Before allotting shares, a public company in India must have at least 7 members and 3 directors, as well as issue a prospectus or file a declaration instead of a prospectus with the Registrar.
    • Private Company or Private Limited Company – A public business cannot be held by the general public; it has a limited number of members, no right to transfer its shares, and no offer to the general public to subscribe to any of the company’s shares or debentures.
      • In the United Kingdom, a private corporation is a legal entity with its name, address, at least one director, at least one shareholder, and memorandum and articles of association.
      • A private company in India is a separate legal entity with an appropriate company name, and address, at least two members and a maximum of 200 members, and at least two directors, one of whom is an Indian resident.
    • One Person Company – An Indian private limited business with only one founder or promoter is known as a one-person corporation. A natural person who lives in the country should be the founder. There is also a paid-up capital (50 lakh) and average turnover (two crores in the three previous financial years) criterion for a one-person business.

Companies Act 2006:

The Act established a comprehensive code of company law for the United Kingdom and made modifications to practically every aspect of business law. The following are the major provisions:

  • Certain existing common law concepts, such as those relating to directors’ duties, are codified in the Act.
  • It incorporates the European Union’s Takeover Directive and Transparency Directive into UK legislation.
  • It includes several new provisions for both commercial and public businesses.
  • It replaces the two distinct (but identical) systems for Great Britain and Northern Ireland with a single business law regime that applies across the United Kingdom.
  • It also modifies or restates practically all of the Companies Act 1985[4] in various ways.

Business owners may be particularly interested in Section 172 of the Companies Act of 2006. Directors must “advance the prosperity of the company,” according to Section 172[5] of the Companies Work 2006, which means they must act in the best interests of shareholders. The Section 172 Companies Act, on the other hand, significantly expanded the number of stakeholders to whom “business success” applies. It was a contentious issue, and it required board members to evaluate the following:

  • Decisions’ long-term effects
  • Relationship building with suppliers, distributors, and customers, among other things.
  • Environmental and community impact of the company.
  • The desire to uphold strong corporate ethics and a positive reputation.
  • The requirement to treat all employees equally.
  • Employee motivation

The insertion of Section 172 to the Companies Act also provides new administrative procedures for businesses. In other words, they must file a Section 172 statement demonstrating how their company meets the foregoing standards.

Companies Act 2013:

The Companies Act of 1956[6] was divided into 658 sections, and the 2013 Act is divided into 29 chapters with 470 parts and 7 schedules. However, there are just 484 sections in this Act right now. After gaining the President of India’s assent on August 29, 2013, the Act partially superseded the Companies Act, 1956. On August 30, 2013, Section 1[7] of the Companies Act, 2013 went into effect.

On September 12, 2013, 98 different sections of the Companies Act went into effect, with a few adjustments, such as the maximum number of members for private companies increased from 50 to 200. With only 98 provisions of the Legislation notified, a new phrase of “one-person company” is included in this act, which will be a private corporation. From April 1, 2014, a total of 183 new sections took effect.

Few of the key points which are required to be kept in the notice under this act are,

  • The maximum number of members (shareholders) a Private Limited Company can have has been increased from 50 to 200.
  • Corporate Social Responsibility is addressed in Section 135[8] of the Act.
  • The company should be headed by one person.
  • The Company Law Tribunal and the Company Law Appellate Tribunal are two tribunals that deal with business law.

Landmark Cases under the Companies Act:

  • Salomon Vs. Salomon & Co. Ltd

Facts – Aaron Salomon’s firm was formed as a corporation in 1892, with his wife, daughter, four sons, and himself as shareholders. Mr. Salomon, the company’s managing director, sold the company for £39,000 and took out a £10,000 debt. Edmund Broderip paid Mr. Salomon a £5000 advance on the security of the debentures. Soon after, there was a drop in sales, which was followed by strike action, resulting in a business downturn. Because of his position and duty in the company, Mr. Edmund sued Mr. Salomon to ensure security.

Issue – Is it possible to sue Mr. Salomon because of his position and responsibilities in the company, and whether he is personally liable for the debts?

Judgment was given – Mr. Salomon, the firm’s creator, is protected from the personal obligation to creditors because the corporation is a separate legal entity from its members. The court upheld the corporate personhood doctrine established by the Companies Act of 1862[9]. As a result, creditors of an insolvent company cannot sue the company’s shareholders to collect outstanding debts.

  • Balfour Vs. Balfour

Facts – Mr. and Mrs. Balfour lived together in Ceylon, where he worked as a construction engineer for the government (Sri Lanka). Both the husband and the wife now had rheumatoid arthritis. Mrs. Balfour’s doctor urged her to return to England due to the harsh climatic conditions in Ceylon. Mr. Balfour promised her a monthly stipend of £30. He did not, however, keep his word. As a result, Mrs. Balfour filed a lawsuit against Mr. Balfour for failing to honor the conditions of the agreement.

Issue – Is Mr. and Mrs. Balfour’s contract legally binding?

Judgment was given – The court determined that the pledge made by the husband and wife is not a contract. A contract can’t be formed only based on promises.

  • Durga Prasad Vs. Baldeo

Facts – The complainant, Durga Prasad, asked the district collector to construct several outlets across the city. The defendant rented the outlets for business purposes. The rent was set, but later, in exchange for the outlets’ construction, the defendant proposed to pay a 5% fee on all items he would sell from the rented outlets.

The defendant, however, failed to provide such a commission. As a result, the defendant was sued by the plaintiff.

Issue – What determines whether a contract is genuine and legitimate?

Judgment was given – The contract was declared void by the court due to the lack of consideration required to form a contract, as stated in Section 25(iii) of the Indian Contract Act 1872[10], which states that “an agreement without consideration is void.”

  • Sri Gopal Jalan & Co. Vs. Calcutta Stock Exchange Association Ltd.

Facts – In this case, the appellant, who was accepted as a shareholder in the respondent Company for the proceedings, claimed that the company had failed to file a return of the allotment of his shares with the registrar as required by law, and filed a complaint with the High Court in Calcutta.

Issue – The definition of the word allocation as defined under Section 75(i)[11] of the Companies Act, 1956 was challenged in court.

Judgment was given – The Court determined that re-issuing a forfeiture share is not the same as an allotment of a share as defined by Section 75(i). The term “allotment” refers to the company’s acceptance of a share offer.

Conclusion:

Companies Act is considered to be an important act from the perspective of the proper working of the firms thereby following the lawsuits purely without any illegitimate act being included in it. Adding to all of it, the act being an important piece of legislation helps in regulating the formation, financing, functioning, and winding up of companies. Moreover, the act contains the mechanism regarding organizational, financial, and managerial, all the relevant aspects of a company.

Author – Tashmayee Sarkhel, currently pursuing a B.A.LL.B. (Hons.) at University Law College and Department of Studies in Law, Bangalore University.

  1. The Companies Act, 2006
  2. The Companies Act, 2013
  3. The RBI Act, 1934
  4. The Companies Act, 1985
  5. The Companies Act, 2006, s.172
  6. The Companies Act,1956
  7. The Companies Act, 2013, s.1
  8. The Companies Act, 2013, s.135
  9. The Companies Act, 1862
  10. Indian Contract Act, 1872, s.25(iii)
  11. The Companies Act, 1956, s.75(i)