🌱 Before you start — a quick pep talk
Most students fear Law for the wrong reason. The rumour is "it's all cramming — either you mug it up word-for-word or you fail." That's not true, and it's why so many toppers actually find Law one of the easiest scoring subjects.
Law rewards structure, not memory of every word. Examiners aren't checking if you've photocopied the Bare Act in your head — they're checking if you understood what a provision is trying to protect, and whether you can apply it to a new fact pattern. Once you understand the "why" behind a section (why does incorporation need a certificate? why is the corporate veil lifted only in specific situations?), the "what" sticks on its own.
Here's the actual, low-stress way to study this chapter for marks:
- Read for logic first, memorise second. Understand the story — why the law exists — before trying to recall section numbers.
- Keywords beat full sentences. Examiners award marks for the correct legal keyword and correct reasoning, not exact textbook phrasing. "Separate legal entity," "conclusive evidence," "ultra vires" — these carry the marks.
- Case names are marks, not trivia. You don't need every detail of a case — just the principle it established and one line of "why it matters."
- Practice applying, not just reading. Most Law questions are fact-based ("X did this — is it valid?"). The def/tip/table boxes below exist so you can test yourself on application, not just recognition.
Meaning of a Company
A company is an artificial person, created by law, having a separate legal identity from its members, perpetual succession, and a common seal (optional post-2015 amendment). It is neither flesh and blood, yet the law treats it as a real person capable of owning property, entering contracts, suing and being sued.
A "company" means a company incorporated under the Companies Act, 2013 or under any previous company law.
"A company is a legal person distinct from its members." — Salomon v. Salomon & Co. Ltd. (1897), the foundational case for the concept of separate legal entity.
Characteristics of a Company
🏛️ Separate Legal Entity
- Company has its own identity, independent of shareholders
- Can own property, sue and be sued in its own name
♾️ Perpetual Succession
- Death, insolvency or exit of members doesn't affect existence
- "Members may come and go, but the company goes on forever"
🛡️ Limited Liability
- Liability limited to unpaid amount on shares held (co. limited by shares)
- Or limited to guarantee amount (co. limited by guarantee)
🔄 Transferable Shares
- Shares are movable property (Sec. 44), freely transferable in public companies
- Restricted, not prohibited, in private companies
⚖️ Separate Property
- Company's assets belong to the company, not to its members
- Members have no insurable interest in company property
🖋️ Common Seal / Signature
- Optional since the 2015 amendment
- If no seal, authorised signatories can sign on the company's behalf
🎓 Capacity to Sue
- Company can sue and be sued in its own corporate name
👥 Separation of Ownership & Management
- Shareholders own the company; the Board of Directors manages it
Corporate Veil & Its Lifting
The "corporate veil" is the legal curtain that separates the company from its members — it is what allows the company to be treated as a distinct legal person. Courts generally respect this veil, but in certain situations they will "lift" or "pierce" it to look at the real persons behind the company.
⚖️ Judicial Grounds
- Fraud or improper conduct
- Determining the enemy character of a company (wartime)
- Company used as a mere sham / cloak
- Protection of revenue (tax evasion)
📜 Statutory Grounds
- Reduction of membership below statutory minimum
- Misdescription of company name on documents
- Fraudulent conduct of business (Sec. 339)
- Failure to refund application money (Sec. 39)
Examiners love case-based MCQs here. Remember Salomon v. Salomon upheld the veil, while Gilford Motor Co. v. Horne and Jones v. Lipman are classic cases where courts lifted it due to fraud.
Classes of Companies
Companies under the Act can be classified on the basis of liability, number of members, and control.
| Basis | Type | Key Feature |
|---|---|---|
| Liability | Company limited by shares | Liability limited to unpaid share value |
| Company limited by guarantee | Liability limited to a guaranteed amount | |
| Unlimited company | No limit on members' liability | |
| Number of Members | One Person Company (OPC) | Single member, Sec. 2(62) |
| Private Company | Min. 2, max. 200 members; restricts share transfer | |
| Public Company | Min. 7 members, no upper limit | |
| Small Company | Paid-up capital ≤ ₹4 crore & turnover ≤ ₹40 crore* | |
| Control / Ownership | Holding Company | Controls composition of Board / share capital of another co. |
| Subsidiary Company | Controlled by the holding company | |
| Associate Company | Company with significant influence (≥20% voting power) | |
| Government Company | ≥51% paid-up capital held by Govt. (Central/State) |
*Threshold limits are as amended and may be revised by notification — always cross-check the current limit before the exam.
Foreign Company — incorporated outside India but has a place of business in India. Dormant Company — formed for a future project or to hold an asset, with no significant accounting transactions (Sec. 455). Listed Company — has securities listed on a recognised stock exchange.
Types of Share Capital
Authorised (Nominal) Capital
- Maximum capital a company is authorised to raise, as stated in the MOA
Issued Capital
- Part of authorised capital offered to the public/subscribers for subscription
Subscribed Capital
- Part of issued capital actually subscribed / taken up by investors
Called-up Capital
- Part of subscribed capital that the company has called for payment
Paid-up Capital
- Part of called-up capital actually paid by the shareholders
Reserve Capital
- Uncalled part of capital that can only be called up on winding up
Incorporation of a Company
Incorporation is the legal process of registering a company with the Registrar of Companies (ROC), giving it a separate legal existence.
- Promotion — idea conception, feasibility check, and preliminary arrangements by promoters.
- Name approval — reservation of company name via the RUN / SPICe+ Part A service.
- Drafting — preparation of the Memorandum of Association (MOA) and Articles of Association (AOA).
- Filing with ROC — SPICe+ Part B along with MOA, AOA, declarations, and identity/address proofs of subscribers & directors.
- Certificate of Incorporation — issued by the ROC; this is conclusive evidence that all requirements of the Act have been complied with (Sec. 7).
A company comes into existence from the date mentioned in the Certificate of Incorporation, and this certificate is conclusive proof of incorporation — it cannot be challenged later even for procedural irregularities.
Memorandum of Association (MOA)
The MOA is the company's charter document — it defines the scope of activities and the fundamental conditions on which the company is incorporated. Governed by Sections 4 and 13.
| Clause | What It States |
|---|---|
| Name Clause | Company's name, ending with "Limited"/"Private Limited" (unless Sec. 8 company) |
| Registered Office Clause | State in which the registered office is situated |
| Object Clause | Purpose(s) for which the company is formed — most important clause |
| Liability Clause | States whether members' liability is limited or unlimited |
| Capital Clause | Authorised share capital, divided into shares of fixed value |
| Subscription Clause | Names and signatures of initial subscribers agreeing to take shares |
Any act done by the company beyond the powers stated in the object clause of the MOA is ultra vires — void and cannot be ratified, even by all the members together.
Articles of Association (AOA)
The AOA contains the internal rules and regulations governing the company's day-to-day management — it is subordinate to, and must not conflict with, the MOA or the Act.
Typically Covers
- Share capital, rights of shareholders, share transfer & transmission
- Board meetings, general meetings, voting rights
- Directors' appointment, powers, and remuneration
- Dividends, accounts, audit and winding up procedure
MOA vs AOA
- MOA = the company's constitution (what it can do)
- AOA = the internal rulebook (how it functions)
- AOA is subordinate to the MOA — any conflicting clause is void
Indoor Management vs Constructive Notice
📢 Doctrine of Constructive Notice
- MOA & AOA are public documents, filed with the ROC
- Every person dealing with the company is deemed to know their contents
- Protects the company against outsiders
🚪 Doctrine of Indoor Management
- Outsiders are entitled to assume that internal procedures have been properly followed
- They are not bound to check internal irregularities
- Protects outsiders dealing with the company in good faith
- Origin: Royal British Bank v. Turquand (1856) — also called the "Turquand Rule"
The rule does not protect outsiders where there is knowledge of irregularity, suspicion of irregularity, forgery, or where the outsider failed to make proper inquiry despite being put on notice.
Quick Revision Summary
Must-remember cases
- Salomon v. Salomon — separate legal entity
- Turquand's Case — indoor management
- Gilford Motor Co. v. Horne — veil lifted (fraud)
Must-remember sections
- Sec. 2(20) — meaning of company
- Sec. 3 — formation of company
- Sec. 7 — incorporation & certificate
- Sec. 4 & 13 — MOA and its alteration
Numbers to remember
- Private co.: 2–200 members
- Public co.: min. 7, no max
- OPC: exactly 1 member
Common confusion points
- Ultra vires acts can never be ratified
- Certificate of incorporation is conclusive proof
- AOA cannot override the MOA
Practice MCQs
1. The concept of separate legal entity of a company was firmly established in:
- Foss v. Harbottle
- Salomon v. Salomon & Co. Ltd.
- Turquand's Case
- Gilford Motor Co. v. Horne
Answer: B
2. Minimum number of members required to form a private company is:
- 1
- 2
- 7
- 3
Answer: B
3. The Doctrine of Indoor Management primarily protects:
- The company against its own directors
- Outsiders dealing with the company in good faith
- The Registrar of Companies
- Minority shareholders
Answer: B