The Companies Act, 2013

🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam.

The Companies Act, 2013 — Key Facts for CMA Foundation Core concept: A company is a voluntary association of persons registered under the Companies Act, having independent legal existence separate from its members. Key distinction: Public company (minimum 7 members, freely transferable shares) vs. Private company (minimum 2 members, restricted transfer, max 200 members). High-yield point: Limited liability — In a limited company, shareholders’ liability is limited to unpaid portion of shares (or guarantee amount) — their personal assets are protected. ⚡ Exam tip: The doctrine of Lifting the Veil of Incorporation (Section 6) is frequently tested — courts will disregard the corporate veil when the company is used for fraud or tax evasion.

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🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

The Companies Act, 2013 — CMA Foundation Study Guide

Overview The Companies Act, 2013 (Act 18 of 2013) received presidential assent on 29 August 2013 and is administered by the Ministry of Corporate Affairs (MCA). It replaced the Companies Act, 1956 and introduced significant reforms including corporate governance, CSR, class action suits, and e-governance. The Act has 470 sections across 29 chapters with 7 schedules.

Types of Companies

Type	Private Company	One Person Company	Public Company
Min Members	2	1	7
Max Members	200	1	Unlimited
Min Directors	2	1	3
Share Transfer	Restricted	Not permitted	Freely transferable
Invitation to public	Prohibited	Prohibited	Allowed
Min Paid-up Capital	₹1 lakh (now removed)	₹50,000	₹5 lakh

Incorporation (Sections 3–7)

• Memorandum and Articles of Association must be filed with ROC
• Digital Signature (DSC) and Director Identification Number (DIN) required
• Certificate of Incorporation issued = company comes into existence (Section 9)

Study strategy: Focus on characteristics of a company, types of companies, promoter liability, and key doctrines like lifting the corporate veil.

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🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

The Companies Act, 2013 — Comprehensive CMA Foundation Notes

1. Definition and Nature of a Company (Sections 2, 3)

Definition [Section 2(20)]

A company is a company incorporated under:

• This Act, OR
• Any previous company law

Salient Features of a Company

1. Separate Legal Entity (Salomon v. Salomon & Co. Ltd., 1897)

   • Company is a person distinct from its members
   • Can own property in its own name
   • Can sue and be sued in its own name
   • Members are not liable for company’s debts
   • Key case: Solomon v. Salomon (1897) — Even sole shareholder cannot be held liable for company debts

2. Perpetual Succession

   • Company does not die with member’s death
   • Membership changes do not affect company’s existence
   • Dissolution requires formal winding up

3. Limited Liability

   • In company limited by shares — Liability limited to unpaid share capital
   • In company limited by guarantee — Liability limited to guarantee amount
   • In unlimited company — No limit on members’ liability

4. Separate Property

   • Company’s property belongs to the company, not members
   • Even if one person holds all shares, company and individual are separate

5. Transferability of Shares (Public companies)

   • Shares in public company are freely transferable
   • Articles can restrict but not prohibit transfer

6. Artificial Legal Person

   • Created by law, not by natural birth
   • Has rights and duties
   • Can be dissolved (unlike natural person)

2. Types of Companies

By Liability

Type	Liability	Examples
Company limited by shares	Limited to unpaid share value	Most companies
Company limited by guarantee	Limited to guarantee amount	Clubs, chambers of commerce
Unlimited company	No limit	Rare, mostly in UK

By Ownership

Type	Description
Government company	≥51% held by Central/State government
Foreign company	Incorporated outside India with place of business in India
Holding company	Controls another company (≥51% voting power)
Subsidiary company	Controlled by holding company
Associate company	Significant influence (20-50% voting power)

By Number of Members

Type	Min	Max
Private company	2	200
Public company	7	Unlimited
One Person Company (OPC)	1	1

Special Types

Small Company [Section 2(85)]:

• Not listed or subsidiary of listed company
• Paid-up capital ≤ ₹10 crore
• Turnover ≤ ₹100 crore
• Benefit: Simplified compliance — less frequent board meetings, no CSR obligation

Dormant Company [Section 455]:

• No significant accounting transaction for 2 years
• Has no assets/liabilities
• Can be struck off or reactivated

Nidhi Company [Section 406]:

• Works for mutual benefit of members
• Borrowing from members only; lending to members only
• Minimum 50 members required

Producer Company [Section 378A]:

• For primary producers (farmers, artisans)
• Incorporated as a cooperative with company features

3. Incorporation (Sections 3–7)

Process of Incorporation

Step 1: Obtain Digital Signature (DSC) for all subscribers
Step 2: Obtain Director Identification Number (DIN) for proposed directors
Step 3: Name reservation with MCA (RUN service)
Step 4: Draft Memorandum of Association (MoA)
Step 5: Draft Articles of Association (AoA)
Step 6: File with Registrar of Companies (RoC):
        - Form INC-32 (SPICe+ form for incorporation)
        - Declaration by directors/subscribers
        - Address of registered office
Step 7: Pay registration fees
Step 8: Certificate of Incorporation issued (Section 9)

Certificate of Incorporation

• Is conclusive evidence of proper incorporation
• Cannot be questioned in any court after it is granted
• Once incorporated, the company comes into existence as a separate legal person

Effects of Incorporation (Section 9)

• Company becomes a legal person
• Can sue and be sued
• Can hold property
• Has perpetual succession

4. Memorandum of Association (MoA) — Sections 2(56), 4

Definition

The Memorandum of Association is the fundamental charter of the company that defines:

• The scope of company’s activities
• Its relationship with the outside world
• The ultimate boundaries of what the company can do

Contents of MoA (Section 4)

1. Name clause — Company name ending with “Limited” (public) or “Private Limited” (private)
2. Registered office clause — State in which registered
3. Objects clause — Main objects and ancillary objects
4. Liability clause — Nature of members’ liability
5. Capital clause — Authorized share capital and its division
6. Association/_subscription clause — Declaration of intention to form company

Doctrine of Ultra Vires (Section 6)

Any act beyond the objects in MoA is void — the company cannot be bound by it. Directors who enter into ultra vires transactions are personally liable.

Ultra Vires Acts:

• Acts beyond main objects = Void
• Acts beyond ancillary objects = Void unless ratified by special resolution
• Donations beyond scope of MoA = Void; directors personally liable

Alteration of MoA (Section 13–14)

• Can alter by special resolution
• Change of name requires Registrar’s approval
• Change of objects requires special resolution + newspaper publication

5. Articles of Association (AoA) — Section 5

Definition

Articles of Association are the internal regulations of the company governing:

• Internal management
• Rights and duties of members
• Conduct of meetings
• Dividend distribution
• Appointment and powers of directors

Relationship with MoA

• AoA is subordinate to MoA
• Any provision in AoA conflicting with MoA is void
• Shareholders’ agreement can override AoA in certain cases

Alteration of AoA (Section 14)

• Can be altered by special resolution
• Must not be inconsistent with the Act or MoA
• Bona fide for benefit of company — courts will not interfere

Effect of AoA

• Binds members as if signed by each member
• Is a contract between members and company (Section 10)

6. Promoters and Pre-incorporation Contracts (Sections 2(69), 11)

Promoter

A promoter is a person who:

• Undertakes to form a company
• Sets up its objects and structure
• Arranges initial capital
• Files documents with Registrar

Promoter is NOT an agent of the company before incorporation — pre-incorporation contracts are not binding on the company (unless ratified after incorporation).

Pre-incorporation Contracts (Section 15, Indian Contract Act)

• Contracts made before company is incorporated are not binding on the company
• Promoter is personally liable
• Exceptions:
  • If company adopts the contract after incorporation
  • If third party agrees to look only to the promoter

Promoter’s Duty

• Fiduciary duty — Must act in good faith; cannot make secret profit
• Must disclose profit to company
• Must not buy company’s property for themselves without disclosure

7. Corporate Veil and Lifting the Veil (Section 6)

The Corporate Veil Doctrine

The corporate veil separates the company from its members. Members generally cannot be held liable for company’s debts — this is the limited liability principle.

When Courts Will Lift the Veil (Section 6,例外)

Courts will disregard the corporate personality (lift the veil) when:

Situation	Authority
Fraud or evasion	Section 6 — Company used for fraud
Tax evasion	Revenue authorities can pierce veil
Alter ego doctrine	Company is mere alter ego of directors
Group companies	Subsidiaries treated as part of parent group
Unrealistic capital	Inadequate capitalization for business risks
Agency relationship	One company is merely an agent of another
Law requires identification	Statutory provisions (e.g., enemy company)

Key Cases:

• Solomon v. Salomon (1897) — Veil upheld; company is distinct from members
• Tata Engineering v. State of Bihar (1965) — Veil lifted; fraud on company law
• Gilford Motor Co. v. Horne (1933) — Veil lifted to prevent fraud

8. Membership and Shareholders (Sections 2(55), 8)

Who Can Be a Member

• Individual (above 18 years, sound mind)
• Body corporate
• Firm (through partner as nominee)
• Minor (can hold shares through guardian; no voting rights until majority)
• Non-resident (allowed unless prohibited)

Modes of Acquiring Membership

1. By subscription to MoA (founder members)
2. By allotment of shares
3. By transfer of shares (public company)
4. By transmission (operation of law — e.g., death, insolvency)

Cessation of Membership

• Transfer of shares
• Transmission on death
• Forfeiture of shares
• Surrender of shares

9. Share Capital (Sections 2(84), 43–54)

Types of Share Capital

Type	Description
Authorized/Registered Capital	Maximum capital stated in MoA
Issued Capital	Capital offered to public for subscription
Subscribed Capital	Capital actually subscribed by public
Called-up Capital	Amount called by company on shares
Paid-up Capital	Amount actually paid by shareholders
Uncalled Capital	Amount not yet called
Reserve Capital	Amount not called to provide for contingencies

Classes of Shares

Equity Shares:

• Right to vote
• Right to dividends (residual)
• Right to surplus on winding up
• No preferential rights

Preference Shares:

• Fixed dividend (or variable with conditions)
• Preferential return of capital on winding up
• Usually no voting rights (unless dividend in arrears)
• Types: Cumulative, Non-cumulative, Participating, Non-participating, Redeemable

Issue of Shares at Premium and Discount

• Section 52 — Shares can be issued at a premium (above face value); premium goes to Securities Premium Account — can be used for certain purposes only (not for dividends)
• Section 53 — Shares cannot be issued at a discount except for ** sweat equity shares**

10. Directors and Key Managerial Personnel (Sections 2(34), 149–181)

Board of Directors

• Minimum directors:
  • Private company: 2
  • Public company: 3
  • OPC: 1
  • Listed company: 3 (at least 1 woman and 1 independent director)

Director Identification Number (DIN)

• All directors must have DIN
• Assigned by MCA on application
• Must be quoted on all documents signed by director

Types of Directors

Type	Description
Managing Director	Executive, full-time, chair of board
Whole-time Director	Executive, devoted full-time
Independent Director	Non-executive, no business relationship
Women Director	Mandatory for listed and prescribed companies
Small Shareholder Director	Elected by small shareholders
Additional Director	Appointed by board between AGMs
Alternate Director	Replaces absent director temporarily

Powers of Board (Section 179)

Board has power to:

• Issue securities
• Borrow money
• Invest funds
• Approve financial statements
• Appoint KMPs

Restrictions on Board Powers (Section 180)

Certain powers require prior approval of shareholders (via ordinary/special resolution):

• Sale/lease/disposal of whole/substantial undertaking
• Remuneration to directors
• Borrowings exceeding paid-up capital + free reserves
• Related party transactions (above threshold)

Directors’ Duties (Section 166)

1. Act in accordance with AoA
2. Act in good faith for company’s benefit
3. Exercise due diligence and reasonable care
4. Avoid conflict of interest
5. Not make secret profits
6. Not accept bribes or gifts from third parties
7. Exercise powers for proper purpose

11. Company Meetings and Resolutions

Types of Meetings

Meeting	Who	When	Quorum
Statutory Meeting	Public company only	Within 6 months of incorporation	1/10th of total members
AGM (Annual General Meeting)	All companies	Within 6 months of year-end; not later than 15 months after last AGM	5 members (private) / 30 members or 1/10th (public)
EGM (Extraordinary General Meeting)	All companies	As and when needed	Same as AGM

Resolutions

Resolution	Threshold	When Used
Ordinary Resolution	Simple majority (>50%)	Routine business
Special Resolution	3/4 majority (>75%)	Alteration of AoA/MoA, changes in capital, related party transactions
Resolution requiring prior notice	As per Section 100	Shorter notice with consent

Voting Rights

• On show of hands: One person one vote
• On poll: One share one vote (equity)
• Postal ballot: For listed companies, prescribed companies

12. Key Doctrines

Indoor Management Rule (Turquand’s Case, 1866)

The rule: Third parties are entitled to assume that the company’s internal procedures have been properly followed. They are not bound to inquire whether internal rules were followed.

Exception: If third party has notice of irregularity — the company is not bound.

Constructive Notice of Documents

The rule: Anyone dealing with the company is deemed to have constructive notice of:

• Memorandum of Association
• Articles of Association

Lifting the Veil — When Applied

Scenario	Authority
Fraud	Section 6
Tax avoidance	Income Tax authorities
Group companies	Courts may consolidate
Agency	Company acting as agent

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