Unit 1: Nature & formation of a company
Company Law notes · PTU syllabus (BCOM 402-18)
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Unit summary
The company is the dominant form of business organisation, governed in India by the Companies Act, 2013. This unit covers the definition and characteristics of a company, lifting the corporate veil, company vs partnership, types of companies (one person, small, associate, dormant, producer), promoters, steps in incorporation and online registration through SPICe+.
After this unit you can
- Define a company and explain its characteristics
- Explain the doctrine of lifting the corporate veil
- Distinguish a company from a partnership and classify types of companies
- Explain the role of promoters and the process of incorporation
PTU syllabus topics
- Definition and characteristics of a company
- lifting the corporate veil
- company vs. partnership
- types of companies (one person, small, associate, dormant, producer)
- steps in incorporation
- promoters and pre-incorporation contracts
- online registration
- 1Name reservation
Apply on the MCA portal
- 2Prepare documents
MOA, AOA, declarations
- 3File SPICe+ form
With director details and DIN
- 4Certificate of incorporation
Company becomes a legal person
- 5Commencement
Business can begin
Topic 1
Definition and characteristics of a company
Section 2(20), Companies Act, 2013: a company means a company incorporated under this Act or under any previous company law. In the words of Lord Justice Lindley, a company is an association of many persons who contribute money or money's worth to a common stock and employ it for a common purpose.
Incorporated association
Comes into existence only on registration
Separate legal entity
Distinct from its members (Salomon v. Salomon & Co. Ltd., 1897)
Perpetual succession
Members may come and go, the company continues
Limited liability
Members liable only up to unpaid share value or guarantee
Transferability of shares
Shares of public companies freely transferable
Common seal
Optional since the 2015 amendment
Capacity to sue and be sued
In its own name
Separate property
Assets belong to the company, not members
Artificial person
Acts through directors and agents
Example
In Salomon v. Salomon & Co. Ltd. (1897), Salomon sold his business to a company he controlled and held secured debentures. When the company failed, the House of Lords held that the company was a separate person, so Salomon as a secured creditor was paid before unsecured creditors.
Topic 2
Lifting the corporate veil
Lifting (piercing) the corporate veil means disregarding the separate entity of a company and looking at the persons behind it, holding them personally liable.
Statutory grounds (under the Act)
- Misstatement in prospectus — Sections 34 and 35.
- Fraudulent conduct of business — Section 339 (during winding up).
- Failure to refund application money and acting without proper incorporation.
- Investigation into ownership of a company — Section 216.
Judicial grounds
- Fraud or improper conduct — Gilford Motor Co. v. Horne (1933): a company formed to evade a non-compete covenant.
- Determining enemy character — Daimler Co. v. Continental Tyre & Rubber Co. (1916).
- Evasion of tax — Dinshaw Maneckjee Petit (1927): companies formed only to split income.
- Sham or façade company, avoidance of welfare legislation, protecting public policy.
- Agency or trust relationship; single economic entity in groups.
Exam tip
In answers, first state the Salomon rule, then list statutory and judicial exceptions with one case each — this is the standard marking scheme.
Topic 3
Company vs partnership
Law
Companies Act, 2013
Indian Partnership Act, 1932
Legal status
Separate legal entity
No separate entity from partners
Liability
Limited
Unlimited, joint and several
Members
Private 2–200 (OPC 1); public minimum 7, no maximum
2 to 50
Registration
Compulsory
Optional
Transfer of interest
Shares transferable (restricted in private)
Not without consent of all partners
Management
Board of directors
Partners themselves
Continuity
Perpetual succession
May dissolve on death or insolvency of a partner
Audit
Compulsory
Not compulsory under the Partnership Act
Topic 4
Types of companies
By incorporation
Chartered, statutory, registered
By liability
Limited by shares, limited by guarantee, unlimited
By number of members
One person, private, public
By control
Holding, subsidiary, associate
By ownership
Government company, foreign company
Special
Section 8 (non-profit), small, dormant, producer, listed
Companies named in the syllabus
| Type | Section | Key features |
|---|---|---|
| One Person Company (OPC) | 2(62) | One member (natural person, Indian citizen; resident condition relaxed to 120 days), one nominee, at least one director; "OPC" in brackets after name |
| Private company | 2(68) | Restricts transfer of shares; 2–200 members; no public invitation; minimum 2 directors |
| Public company | 2(71) | Not private; minimum 7 members; minimum 3 directors; subsidiary of a public company is public |
| Small company | 2(85) | Private company with paid-up capital up to ₹4 crore and turnover up to ₹40 crore (thresholds revised by MCA from time to time — check the latest notification) |
| Associate company | 2(6) | Another company has significant influence — control of at least 20% of voting power or business decisions under an agreement — but it is not a subsidiary |
| Dormant company | 455 | Formed for a future project or to hold an asset/IP, with no significant accounting transaction; applies to the Registrar for dormant status |
| Producer company | Part IA of the 1956 Act (now Chapter XXIA, Sections 378A–378ZU of the 2013 Act) | Formed by primary producers (farmers, artisans) for production, harvesting, procurement, marketing |
- Small companies enjoy relaxations: no cash-flow statement required, fewer board meetings (two a year), lower fees and penalties.
- Section 8 company: formed to promote commerce, art, science, sports, education, charity; profits applied to objects, no dividend.
Topic 5
Promoters
A promoter is a person who conceives the idea of a company and takes steps to form it — Section 2(69): named as promoter in the prospectus or annual return, has control over affairs, or in accordance with whose advice the board acts (professional advisers excluded).
Functions
- Discovers the business idea and investigates its feasibility.
- Assembles resources and people; decides the name and capital structure.
- Gets the MOA and AOA drafted; appoints first directors, bankers, auditors.
- Enters into preliminary (pre-incorporation) contracts.
- Arranges finance and files incorporation documents.
Legal position
- A promoter is neither an agent nor a trustee of the company (it does not yet exist) but stands in a fiduciary position — must not make secret profits; must disclose interests.
- Pre-incorporation (preliminary) contracts are contracts made by promoters on behalf of a company yet to be formed. They do not bind the company unless it adopts them after incorporation (Specific Relief Act, 1963, Sections 15 and 19); promoters are personally liable on them.
Topic 6
Steps in incorporation and online registration
- 1
Obtain DSC
Digital Signature Certificate for proposed directors
- 2
Name reservation
SPICe+ Part A or RUN (Reserve Unique Name)
- 3
Prepare documents
e-MOA (INC-33), e-AOA (INC-34), declarations, proof of office
- 4
File SPICe+ Part B
Incorporation, DIN, PAN, TAN, EPFO, ESIC, GSTIN, bank account, professional tax
- 5
Scrutiny by the Registrar of Companies (Central Registration Centre)
- 6
Certificate of Incorporation (INC-11)
With Corporate Identity Number (CIN)
- SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus) is an integrated web form on the MCA portal offering 10+ services in one application.
- Certificate of incorporation is conclusive evidence that all requirements have been complied with (Section 7(7) allows action if obtained by fraud).
- Commencement of business: a company with share capital must file a declaration (INC-20A) within 180 days that subscribers have paid for shares (Section 10A).
- Registered office must be established within 30 days and verified (Section 12).
Exam tip
Name the forms — SPICe+, RUN, INC-33, INC-34, INC-20A — examiners appreciate procedural precision.
Key terms
- Company
- An incorporated association that is a separate legal person with perpetual succession
- Corporate veil
- The separation between a company and its members
- OPC
- One Person Company with a single member
- Promoter
- A person who conceives and takes steps to form a company
- SPICe+
- Integrated MCA web form for incorporating a company online
Quick revision
- Separate legal entity — Salomon v. Salomon (1897).
- Veil lifted for fraud, tax evasion, enemy character, statutory provisions.
- Company vs partnership: entity, liability, members, continuity.
- OPC, small, associate, dormant, producer companies.
- Incorporation: DSC → name → documents → SPICe+ → certificate of incorporation.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.Define a company.
- Q2.What is meant by separate legal entity?
- Q3.What is lifting of the corporate veil?
- Q4.What is a One Person Company?
- Q5.What is a dormant company?
- Q6.Who is a promoter?
Long-answer questions
- Q1.Explain the characteristics of a company.
- Q2.Discuss the circumstances in which the corporate veil may be lifted.
- Q3.Distinguish between a company and a partnership, and explain different types of companies.
- Q4.Explain the role of promoters and the procedure for incorporation of a company.
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