Businesses frequently raise capital using a variety of financial instruments to finance their operations and growth. Debentures and shares are two examples of typical financial instruments. While both signify ownership in the business, each has a distinctive function and confers unique rights to the holder.

Investors and stakeholders alike must comprehend the distinctions between debenture holders and shareholders.

This article tells you the definitions of shares and debentures and emphasises the differences between shareholders and debenture holders.

Meaning of Debenture

Section 2(30) of the Companies Act, 2013, provides the definition of the term “debenture”.

Debentures are long-term debt instruments issued by companies to raise capital, typically in the form of bonds or loans secured by company assets. They offer fixed interest rates and can be issued with or without the creation of a charge on company assets.

Debenture Stock: This refers to a type of long-term debt instrument issued by a company to raise funds. Debenture stock represents a loan taken by the company from the public or investors, and it acknowledges the company’s debt obligation to the debenture holders.

Unlike regular debentures, debenture stock is not issued with specific maturity dates but for a perpetual or long-term period.

Bonds: Bonds are another form of long-term debt securities issued by companies to raise capital. They are similar to debentures but may have specific features, such as more extended maturity periods and fixed or variable interest rates, and may be traded in the secondary market.

Any Other Instrument Evidencing a Debt: This part of the definition covers any other financial instrument or security issued by a company that represents a debt obligation.

It could include instruments with different names or characteristics as long as they evidence a debt owed by the company.

Meaning of Shares

As per section 2(84) of the Companies Act, 2013, the term “share” is defined as follows.

A share is a unit of ownership in the share capital of a company. When a company is incorporated, its capital is divided into smaller units, and each unit is known as a share.

These shares represent ownership rights in the company, and individuals or entities who hold these shares are referred to as shareholders.

Difference Between Debenture Holder and Shareholder

1. Shareholders are considered the company’s owners, whereas debenture holders are considered the company’s creditors as they are the lenders of the company.

2. Shareholders have the right to be a part of the company’s decision-making process. In contrast, debenture holders cannot take part in the company’s decision-making process.

3. Shareholders have voting rights, which means they can vote in the company’s meetings. In contrast, debenture holders have no voting rights and can’t vote in company meetings.

4. Shareholders have the right to receive dividends, which are a part of the company’s profit. In contrast, debenture holders have the right to receive interest since they are lenders to the company.

5. The company may or may not pay dividends to the shareholders even if the company is generating profit. In contrast, debenture holders will receive interest whether the company generates profit or loss.

6. In the event of the winding up of the company, shareholders are not given priority over debenture holders in terms of payment.

Conclusion

The functions shareholders and debenture holders play in a company’s financial structure differ. Debenture holders are debtors who get set interest payments, whereas shareholders are owners who can vote and receive possible dividends.

Investors must comprehend these variations to make wise choices depending on their financial objectives and risk tolerance.

Difference Between Debenture Holder and Shareholder
Gayatri Singh

In corporate finance, debentures are a common financial instrument companies use to raise capital. The Companies Act of 2013 defines debentures broadly, covering various types of debt securities. These debentures come with distinct features and characteristics that make them suitable for different financing needs.

This article explores the different kinds of debentures under the Indian Companies Act of 2013 and helps you understand their key features.

Meaning of Debentures

As per section 2(30) of the Companies Act, 2013, the term “debenture” is defined broadly to include the following:

Debenture Stock: This refers to a type of long-term debt instrument issued by a company to raise funds. Debenture stock represents a loan taken by the company from the public or investors, and it acknowledges the company’s debt obligation to the debenture holders. Unlike regular debentures, debenture stock is not issued with specific maturity dates but for a perpetual or long-term period.

Bonds: Bonds are another form of long-term debt securities issued by companies to raise capital. They are similar to debentures but may have specific features, such as more extended maturity periods and fixed or variable interest rates, and may be traded in the secondary market.

Any Other Instrument Evidencing a Debt: This part of the definition covers any other financial instrument or security issued by a company that represents a debt obligation. It could include instruments with different names or characteristics as long as they evidence a debt owed by the company.

Features of Debentures

1. Debenture is considered a loan document because it acknowledges a debt.
2. Debenture is in the form of a certificate issued under the company’s seal called a Debenture Deed.
3. Debenture holders get a fixed rate of interest.
4. Debenture holders will receive interest whether the company generates profit or loss.
5. Debentures have a specific maturity date, which is the date when the principal amount is due to be repaid to the debenture holders.

Types of Debentures

Here are four important kinds of debentures under the Companies Act of 2013 that you should know about.

1. Registered and Bearer Debentures

Registered debentures are types of debentures in which all details of the debenture holder, like addresses, names and particulars, are filed in a register, which the enterprise keeps.

Bearer debentures are a specific kind of debenture that can be transferred only through physical delivery, and the company does not maintain any records of the debenture holders.

2. Secured and Unsecured Debentures

Secured debentures are types of debentures that are secured by charges created on assets of the enterprise. The charge can either be fixed or floating.

Unsecured debentures are types of debentures that are not secured by creating a charge on the assets of the enterprise.

3. Convertible and Non-Convertible Debentures

Convertible debentures are types of debentures that can be converted into equity shares or any other security.

Non-convertible debentures are types of debentures that cannot be converted into equity shares or any other security.

4. Redeemable and Irredeemable Debentures

Redeemable debentures are debentures with a fixed maturity date and are repayable to the debenture holders by the issuer on or after that date.

Irredeemable debentures are types of debentures that do not have a fixed maturity date. They do not come with an obligation for the issuer to repay the principal amount to the debenture holders at any specific time.

Conclusion

The Companies Act, 2013, defines various types of debentures that offer companies flexible financing options and provide investors with diverse investment opportunities.

Understanding these types of debentures allows companies to tailor their funding strategies, while investors can make well-informed decisions based on their preferences and risk appetite. Debentures play a significant role in promoting capital flow and fostering growth in the corporate sector.

Types of Debentures Under the Companies Act, 2013
Gayatri Singh

A share is a unit of capital representing the ownership connection between the company and the shareholder. It is often known as stocks or equity. The amount of shares a person owns defines the ownership percentage of that person in the company. The most common types of shares are preferred shares and equity shares.

Further, share capital is the total amount of funds a company raises by issuance of shares. It serves as the financial backbone of a company.

There are five types of share capital. This article discusses these types in brief.

Types of Share Capital

The five types of share capital are:

Here’s more about all of these.

Authorised Share Capital

The first type of share capital is the authorised share capital. Authorised share capital is the maximum number of shares a firm can issue. Memorandum of Association limits it to a certain amount.

While a company’s constitutional documents may specify a particular amount of authorised share capital, it is not required to be issued immediately. The corporation can issue shares gradually, up to the authorised limit.

Companies can typically alter their authorised share capital by following the given process:

• Firstly, the company has to get the shareholder’s approval through a special resolution.
• Secondly, it has to make changes in the company’s documents to reflect the changes in authorised share capital.
• Lastly, it has to file the required documents with the Registrar of the Companies.

Public companies raise authorised share capital through an initial public offering (IPO) or follow-on public offering (FPO). In contrast, private companies raise authorised share capital through private placement or rights issues.

Related: Allotment of Shares Under Company Law in India

Issued Share Capital

The second type of share capital is issued share capital. Issued share capitals are the authorised shares a company has actually sold or issued to its shareholders. Shareholders who own issued shares have specific rights, including voting at shareholder meetings and receiving dividends.

Issued shares may either be fully paid up or partially paid up. Fully paid-up shares are those for which shareholders have paid the entire value of the shares. Partially paid-up shares are those for which shareholders have paid a part of the whole value, with the balance to be paid anytime later or at the company’s request.

For example, a company has an authorised share capital of 10000 and decides to issue 3000 shares. The investors buy these shares, so the shares sold by the company represent the issued share capital.

Unissued Share Capital

The third type of share capital is unissued share capital. Unissued share capital is those authorised share capital that has not been sold or distributed to shareholders. Simply put, these shares are part of the total share capital the firm is legally permitted to issue but have not been distributed to its investors.

Unissued shares indicate the possibility of future equity funding for the company. The company can issue these shares later to raise extra capital for business expansion, investment possibilities, or other objectives if needed.

For example, a company has an authorised share capital of 10000 shares but has issued only 3000 shares. The remaining 7000 shares represent the unissued share capital.

Subscribed Share Capital

The fourth type of share capital is subscribed share capital, which investors have formally agreed to or promised to buy in the future. Subscribed share capital is typically subscribed as part of an initial public offering (IPO). The company profits from additional funds due to the shareholder’s commitment, similar to giving it a financial boost.

For example, a company sells 10000 shares to expand its operations. Every share is worth Rs 300. Investors expressed their interest and promised to purchase the shares but still needed to make payments. Thus, the subscribed capital is Rs 30 lakhs or 3 million (10000 shares x Rs 300). The example indicates that once investors pay for the promised shares, the company should soon receive Rs 30 lakhs or 3 million.

Paid-Up Share Capital

The paid-up share capital is the last type discussed in this article. It is the portion of issued share capital for which shareholders have paid the whole amount or value. It simply denotes the total sum of money that the company has received from its shareholders for the shares that have been issued.

For example, a company has issued 10000 shares at Rs 100 each. The investors bought all the shares and paid Rs 100 each. The paid-up capital would be 10 lakhs or 1 million.

Five Types of Share Capital in India
Subhashini Parihar

This article provides an overview of the legal status of promoters under the Companies Act of 2013, focusing on their roles, responsibilities, and fiduciary relationship with the company.

Role and Significance of Promoters in Company Formation

In order to establish any company, there should be some individuals present who have the purpose or idea to form a company, who also possess the required resources to carry out that idea, and who strive to do so. They’re known as promoters.

As a result, the promoter is the individual who initiates the development of the whole company and carries out all tasks required for the registration and establishment of a company, such as obtaining subscribers to the memorandum and articles of association, settling the preliminary contract and agreement with the vendors and underwriters, disseminating the prospectus, or hiring specialists like bankers, brokers, legal counsel, first directors, etc.

However, not all professionals, such as accountants or attorneys, who have been hired for their respective jobs on behalf of the promoter will be referred to as promoters.

A company may employ a number of promoters. They could be companies or natural persons. The promoters have no compulsion to play an active role in the formation. A person will still be considered a promoter even if they have had less active involvement.

The role of promoters begins at the very beginning of the company formation and incorporation stage, and the interaction between the promoter and the company begins when the work of establishing the company commences. While it is difficult to describe what a promoter is, the promoter’s legal standing is pretty obvious.

Who Is a Promoter?

The promoter is defined under section 2(69) of the Companies Act, 2013. It refers to a person:

• whose name appears in the prospectus or who has been identified in the annual reports by the company as specified in section 92 of the Companies Act, 2013, or
• who has the authority to direct or otherwise control the management of the company as a shareholder, director, or in any other capacity, or
• who gives advice and instructions to the board of directors, guiding the company’s decisions, but not someone hired by the company for their professional services.

Legal Status of a Promoter

The promoter is elevated to a position of great authority and responsibility. The promoters’ legal position is that they are neither agents nor trustees because the company has not yet been formed. Instead, they are in a fiduciary relationship, which implies they are in a trust-based relationship, and the trust defines their legal standing, which the promoters should not misuse.

As a result of being in a fiduciary relationship, promoters have two key responsibilities:

1. Obligation not to make any hidden profit: A promoter has many benefits since he is the only person in control of forming a company, but this may also lead to a lot of abuse of the powers bestowed upon him. As a result, the promoter is not permitted to profit secretly from any agreements. However, the promoter may do so provided he reveals it to the independent board of directors, the articles of association, the prospectus, or current and prospective shareholders.

2. Obligation to disclose any interest in transactions with the company: In addition to the duty outlined above, the promoter is required to disclose any interest he has in any transactions with the company.

If the foregoing responsibilities are not met, the promoters are breaching their fiduciary duty to the company and abusing their authority. In this case, the company has the option to cancel the contract, recover the secret profit, or sue the promoter.

Promoter duties begin long before the company’s formation, and as a result, the promoter must make several contracts on behalf of the company because it hasn’t yet been formed, and only the promoter can make them. All contracts will have to be authorized and approved by the company when they are incorporated, which means the company seal has to be included or else the contract will not be deemed genuine.

If, on the other hand, the company is unable to accept or ratify the contracts, then any person who suffers losses as a result of the contracts – the promoter must reimburse for such losses. As a result, the promoters are personally liable for all contracts they entered into before the company’s incorporation. There is no provision in the legislation that says that the company would reimburse the promoter’s expenses for the promotion, but the company may compensate the promoters at its discretion.

Promoters are also not paid for their services because they are in a fiduciary relationship. However, promoters have two options for requesting promotion: they can either establish a separate agreement or do so through the subscription of shares.

Case Laws

The right position of the promoter was determined in the case of Erlanger vs New Sombrero Phosphate Co. According to the judgment, promoters have a fiduciary relationship with the company. The court further noted that the promoters are the ones who develop and shape the business and have the ability to select under whose authority the company will operate after its incorporation.

Similarly, in Lagunas Nitrate Co. vs Lagunas Syndicate, the relationship between shareholder and company was examined, and it was determined that they both share the same relationship as promoter and company, which is a fiduciary relationship based on trust and faith.

Conclusion

The promoters are undeniably important in establishing the company and from the perspective of the law. Whether it be with ideas, working with professionals, or hiring workers, the promoters provide the greatest assistance for starting a company.

Legal Status of a Promoter Under Companies Act, 2013
Gayatri Singh

Indian companies are formed and incorporated according to the provisions given under the Companies Act, 2013. All Indian companies are registered under the Companies Act of 2013 and work according to the procedure provided under this Act.

In this law note, you will learn about the nature and characteristics of a company. This will give you a basic understanding of what a company is and its existence.

What Is a Company

In simple words, a company is a business organization formed by an individual or group of individuals who work jointly to achieve a common goal or objective.

Nature and Characteristics of a Company

A company incorporated under the Companies Act, 2013 has certain nature and characteristics, which make it a separate entity and also help us to understand the concept of a company, its functions and its features in society.

The characteristics of a company are:

Let us learn more about these 13 characteristics of a company.

1. Voluntary association.

A company is a voluntary association formed by an individual or group of individuals. Most companies are formed with the motive of profit-making except the section 8 companies (NGO). Profit earned is divided among the shareholders or saved for the future expansion of the company.

2. Company is an artificial person created by law.

A company is an artificial person created by law. It is regarded as a legal person capable of entering into contracts, owning property in its name, suing, and being sued by others.

Case Law: Union Bank of India vs Khader International Constructions and others: The Supreme Court held that the word ‘person’ mentioned in Order 33, Rule 1 of Civil Procedure Code, 1908, includes any company. Thus, a company may also file a suit as an indigent (poor) person.

Info: Order 33, Rule 1 of CPC permits a person to file suit under the code as an indigent person if they cannot bear the cost of litigation.

3. Company is not a citizen.

In State Trading Corporation of India Ltd. vs CTO (Commercial Tax Officer), the Supreme Court held that the State Trade Corporation, although a legal person, is not a citizen and can act only through a natural person.

Certain fundamental rights provided by the Indian Constitution to protect a person are also available to a company. For example – The right to equality (Article 14).

4. Separate legal entity.

A company incorporated under the Companies Act, 2013, is treated as a separate person distinct from its members under the law. Therefore, the company will be liable for all the acts of the company except any illegal act done by the directors of the company.

Case Law: Salomon vs Salomon: Salomon had a business in leather and shoe manufacturing. Due to some circumstances, he created his own company and sold his previous business of shoe manufacturing to this company. Salomon gave one share each to his wife, daughter, sons, and the rest of the company’s shares were held by him. After a few years, the company was wound up and had some existing liabilities but did not have enough assets to pay off the liabilities. Unsecured creditors sued Salomon for repayment of their money, but the court held that the company was not an agent or a trustee for Salomon. The company is entirely different from the individual, and hence, the contentions of the creditors could not be upheld.

5. Company has limited liability.

The liability of a company may be limited either by Shares or Guarantee.

• Company limited by Guarantee: Liability of shareholders is limited to a certain amount of guarantee mentioned in the memorandum payable only at the time of wind up and losses occurred by the company.
• Company limited by Shares: Liability of the members shall be limited to the extent of unpaid money or shares held by them.

6. Company has a perpetual succession.

A company can come to an end only by the process of winding up. The death or retirement of a person does not affect the life of a company.

7. Transferability of shares.

There are three types of companies under the Companies Act:

1. Public company.
2. Private company.
3. One Person company.

A public company is free to transfer its share from one person to another, whereas, in a private company, the right to transfer shares is restricted. And in One Person Company (OPC), the transferability of shares is not allowed.

8. Separate property.

As we have already studied, a company is a separate artificial person created by law, and a company is different from its members. Therefore, a company has its separate property and can own, enjoy, and dispose of properties in its name.

Case Law: In RF Perumal vs H. John Deavin, it was held that no member can claim themselves to be the owner of the company’s property during its existence or its wind up. A company cannot even have an insurable interest in the property of the company.

9. Capacity to sue and be sued.

A company can sue and be sued in its name and may even sue its members. It also has a right to seek damages where a defamatory matter is published about the company, which affects its business.

Case Law: Abdul Haq vs Das Mal: In this case, Das Mal was an employee in the company and was not paid a salary for several months, and therefore, he sued the directors. The court held that the remedy lies against the company and not against the directors or members of the company.

10. Contractual rights.

A company can enter into contracts for the conduct of business in its name.

As a company is not a trustee for its shareholders, a shareholder cannot enforce a contract established by his company because he is neither a party to the contract nor entitled to any benefit from it.

11. Limitation of action.

A company cannot go beyond the power stated in its Memorandum of Association. The Memorandum of Association regulates the power and fixes the objects of the company. Acts done beyond the powers given in the Memorandum of Association are ultra-vires and hence treated void.

12. Separate management.

Members may derive profits without being burdened with the management of the company.

Must See: 9 Types of Directors in a Company

13. Termination of existence.

A company is created by law; throughout its life, carries on its affairs according to the law; and is ultimately wind up by law. A company can be terminated only by the procedure of winding up.

Must Read:
1. What Is the Articles of Association of a Company?
2. Types and Classification of Company under the Companies Act
3. Types of Prospectus Under the Companies Act, 2013

13 Characteristics of a Company Under the Companies Act
Anushka Saxena

Lee v Lee’s Air Farming Ltd
[1961] UKPC 33, [1961] AC 12

A company is a separate legal entity that can operate in its own name. In order to completely understand this concept, you must study the case of Lee vs Lee’s Air Farming Ltd.

Introduction

According to the Companies Act of 2013, a company registered as a non-profit organisation, private limited company, public company, government company, or chit fund company will have a separate legal identity, legal rights, and treatment from its shareholders. This is referred to as a separate legal entity.

Furthermore, the separate legal entity can enter into contracts with third parties, hold property in its own name, and sue or be sued in its own name.

A distinct legal entity is a barrier between a firm and its members. This implies that the business’s assets should only be used to fulfil the goals outlined in the memorandum of association and that the corporation should be responsible for paying its debts independently rather than using the personal assets of its members.

Facts of the Case

The Lee family established Lee’s Air Farming Ltd. in 1945. The firm he founded has Mr Lee as its only managing director.

As the firm’s managing director, Lee chose himself to be its chief pilot and was hired by the company for the role.

Lee passed away in a plane accident in March 1956 while en route to a corporate business.

Lee made all decisions about the company’s contracts and had total control over the company’s operations.

The company engaged in several agreements with insurance companies for employee insurance.

The personal insurance policies that Lee purchased in his name, some of the payments were paid from business bank accounts but afterwards disputed in Lee’s account in the company book. (In other words: Some of the purchases of personal insurance policies in the name of Lee were disputed in the company book as the payments of those purchases were made from business bank accounts.)

Under the New Zealand Worker Act of 1922, Mrs Lee filed a claim for damages on behalf of the deceased worker. She said Lee worked for an organisation.

Issues

Whether Lee, who is the majority shareholder and the controlling owner of the business, be granted compensation under the Workmen Compensation Act?

Whether he (Lee) can be refused remuneration since he was also the managing director, or will he be recognised as an employee in the firm for the purposes of grant of compensation?

Does a master-servant relationship exist between Lee and his business, Lee’s Air Farming Ltd.?

Arguments Before the Court

The insurance company stated that because Mr Lee was the firm’s managing general director and owned the most significant number of shares, he was ineligible to work for the business.

Respondent (insurance company) claimed that everyone who has signed a contract of employment or is employed by a corporation qualifies as a worker, but Mr Lee served as the organisation’s director.

Mrs Lee argued that the New Zealand Worker Act of 1922 entitles her to compensation. She also stated that her husband passed away while en route to work for the company.

In support of the respondent, the appellant added that, as per the Workers Act of 1922, Mr Lee is also a corporate employee.

Governing Principles

This instance demonstrates the practical application of the rules established in the famous Salomon vs Salomon and Co Ltd decision. Salomon’s lawsuit is renowned for creating the corporate entity. A business becomes a legal person apart from its members after it has been adequately and legally established.

According to the corporate personality concept, a company established in accordance with the Companies Act has a separate corporate personality that entitles it to use its own name, operate in its own name, have its own seal, and own assets independent of its members. It stands apart from the individuals that make up its “person.”

As a result, it has the same rights as an individual to own property, incur debts, borrow money, maintain a bank account, employ personnel, enter into contracts, and bring or defend legal actions. Its members are both its owners and potential creditors. A shareholder cannot be held responsible for the company’s decisions, even if he controls almost all of the share capital.

Judgement

The Court determined that Lee was a different person with a personality independent from the business he founded. Lee and his firm, who were both separate legal entities, went into contractual arrangements via which Lee became the company’s principal pilot and an employee.

The Privy Council noted that he might issue orders to himself (in his other pilot position) on the corporation’s behalf while serving as its managing director. He and the firm had a master-servant relationship in his capacity as a pilot.

As a result, he was entitled to compensation for the loss he sustained while working. Under the Workmen Compensation Act, his widow was able to obtain the compensation.

Lee was able to serve as both the master and the servant simultaneously and still got the rewards of both because of the corporate personality concept.

The Court additionally ruled that a shareholder of a corporation may enter into a contract with that firm. A member and a business can engage in legal service contracts since they both function as independent legal entities.

Regardless of Lee’s influence on the firm’s business, Lee and the business had a legal service agreement in place. Lee was, therefore, considered to be an employee. Additionally, Mrs Lee had a right to compensation.

Conclusion

A distinct legal entity is a crucial feature for businesses since it helps to distinguish the identities of the company and its members. Thus, it may be inferred from the previous explanation that the corporation is a distinct legal person.

A corporation’s single owner, shareholder, and director may also be an individual employed by the firm who has engaged in a contract with it as an owner, director, or shareholder. The company is a different legal entity.

In my opinion, the Separate Entity Principle has greatly aided in the growth of contemporary capitalism and has produced enormous amounts of social and economic value. The Separate Entity Principle should remain a cornerstone of company law in perpetuity.

Read Next: Salomon vs Salomon – Case Explained in Easy Words

Lee vs Lee’s Air Farming Ltd – Case Explained
Anushka Saxena

When a company needs to alter its organisational structure, it invites new shareholders or changes the current proportion of shares between them. A firm’s creation and distribution of new shares is known as the allotment of shares.

Here is an article that talks about the process of allotment of shares by a company as per the Companies Act of 2013.

Meaning of Shares

Shares symbolise units of ownership in a company or the guaranteed portion of earnings that an individual investor is entitled to. According to the Companies Act 2013, share means “a share in the company’s share capital, and includes stock except where a distinction between stock and shares is expressed or implied“. A share represents the right to share in the company’s profits.

Meaning of Allotment of Shares

The allotment is distributing a portion of the shares to an underwriting participant (any party who is a member of a company’s financial organisation) during the initial public offering. Both new and existing owners are entitled to receive new shares. Offers for shares are made on application forms the company provides. Once the company accepts the application, the allotment of shares occurs.

A public company often releases a prospectus to invite the public to submit an offer to buy its shares from the company. People submit applications to the company for its shares based on this invitation. An application for shares is the applicant’s offer to buy the company’s shares. When the company accepts this application, it is called an allotment. Allotment of shares is a process through which a company creates and distributes a new number of shares to new or existing shareholders.

As defined by the Companies Act, allotment is appropriating a specific number of shares to a particular person or individuals from the company’s unappropriated share capital.

Procedure for Allotment of Shares as Per Companies Act

The procedure for the allotment of shares is contained under the Companies Act of 2013. Accordingly, the following steps are to be followed by a company for allotting shares to its shareholders.

Firstly, a public company must issue a prospectus or declaration instead of a prospectus requesting offers to purchase shares from the general public. The public then applies for the purchase of shares of the companies after going through the prospectus. The company has the right to either demand the payment of the issue price in whole, along with the application fee or in instalments in the form of share application money, share first call, share second call, etc. A minimum of 5% of the nominal value of the share must be paid as application fees.

Further, a notice is sent to all the shareholders for convening the Extra Ordinary General Meeting to approve the private placement offer letter. And the board of directors must pass a resolution before the allotment of shares. Also, within 30 days after a special resolution is passed in a meeting, Form MGT-14 must be submitted to the ROC (Registrar of Companies).

Subsequently, if the minimum amount, which is the minimum subscription mentioned in the prospectus, is not subscribed or applied, the allotment of shares cannot be made. And, within 60 days of receiving payment from the individuals to whom the shares are to be allotted, allotment of shares occurs.

And finally, a board meeting for the Allotment of shares is called up.

It is to be noted that the share application amount needs to be deposited in a bank, and it can only be used by the company after receiving the commencement certificate.

Furthermore, if the company does not reach 90% of the issue amount within 60 days, it must immediately return and refund the entire subscription amount. A further delay of 78 days or more requires the company to pay 6% interest annually.

Conclusion

Shares symbolise units of ownership in a company or the guaranteed portion of earnings that an individual investor is entitled to. The creation and distribution of new shares by a firm is known as the allotment of shares. A public company must issue a prospectus or declaration requesting offers to purchase shares from the general public.

A minimum of 5% of the nominal value of the share must be paid as application fees. If the minimum amount, the minimum subscription mentioned in the prospectus is not subscribed or applied, the allotment of shares cannot be made.

Read Next: Other Company Law Notes

Allotment of Shares Under Company Law in India
Subhashini Parihar

Salomon vs Salomon & Co. Ltd
(1897) A.C. 22, [1896] UKHL 1

In this case law explanation, you will read about the famous case of Salomon vs Salomon, which is essential to understand company law.

Introduction

Every company has its own identity — a separate legal personality (SLP), and this aspect of a company is a very important and fundamental element of company law.

It is regarded as the most comprehensive and consistent law of corporate jurisprudence since it lays the groundwork for the creation and operation of a company.

On the other hand, the rule of “SLP” has traditionally been fraught with controversy and is one of the subjects of dispute both inside and across jurisdictions.

The concept, established in the case of Salomon vs Salomon, is still widely used and is traditionally praised as the framework of both English company law and the entire system of international commercial law.

Facts of the Case

For many years, Aron Salomon successfully ran a profitable leather business. He decided to change it into a limited company in 1892. At that point, Salomon & Co. Ltd. was established with Salomon as the managing director, along with his wife, daughter, four sons, and wife as members.

For £39,000, the corporation bought Salomon’s business. A charge over all of the company’s assets totalling £10,000 in debentures, £20,000 in fully paid up £1 shares, and the remaining £20,000 in cash were used to pay the purchase price. Salomon possessed 20,001 out of the 20,007 shares issued, and a family member held each of the other six shares.

The business had problems almost immediately, and a year later, the holder of the debentures (Salomon having sold his shares to another party) hired a receiver, and the business entered liquidation.

At the time of liquidation, the value of the assets was divided as follows: liabilities received £6,000 (six thousand pounds), debentures received £10,000, and unsecured obligations received £7,000. Nothing would be left over for the unsecured creditors once the debenture holders had been paid.

As a result, the liquidator filed a lawsuit against Salomon, holding him responsible for covering the company’s trade debts.

Issues

• Whether Salomon & Co. Ltd. indeed existed as a company?
• Whether the company, an artificial invention of the law, had actually been properly constituted under any circumstances.
• Whether Salomon was accountable for the business’s debts?

Arguments Brought Before the Court

Salomon & Co. Ltd. was formed under the Act, but according to the liquidator, the business never existed independently. Salomon became the undisputed king due to the large majority of shares. The firm was fake, and the business was run exclusively for and by him.

Judgement

According to the House of Lords, in order to answer the question, it is required to examine the legislation itself without altering or adding to its provisions. The legislation itself must be the entire reference point.

In this instance, the Act stated that any seven or more people who are connected for a legitimate purpose may create a company with or without limited liability by signing their names to a memorandum of association and otherwise complying with the Act’s registration requirements.

Additionally, the Act stated that “no subscriber shall take less than one share.” There was no question that seven genuine living people owned the company’s shares. The court determined that the firm had been legitimately created and was an actual corporation (company) since it complied with the Act’s criteria.

House of Lords held that the provisions of the Act did not require that the people subscribing shall not be related to each other or that owning a single share shall not afford a sufficient qualification for membership, rejecting the liquidator’s argument that Salomon and his family members purchased all the shares and that the company was nothing more than a one-man show.

A creditor of the firm is unconcerned whether the company’s capital is owned by seven people in equal shares, each of whom has the right to an equivalent portion of the earnings, or if it is nearly entirely owned by one person, who gets almost all of the profits.

If one individual controls most of the firm’s capital, the company does not lose its identity. The company in question and its subscribers are entirely different people. The House of Lords also claimed that nothing in the Act required the subscribers to be independent, have a say in a significant amount of the undertaking, or have their own free will.

Conclusion

After this incident, the idea of removing the corporate veil was developed so that no one could commit fraud and escape responsibility by hiding behind the company’s organisation.

There should be some possibilities for applying this idea of lifting the corporate veil. Since a charge secured Aron Salomon’s debt against the company’s assets, it was determined in this case that he had committed no fraudulent or unlawful acts and was the company’s legitimate creditor. As a result, he had a right to be paid at the company’s winding up before any unsecured creditors.

Salomon vs Salomon – Case Explained in Easy Words
Anushka Saxena

State of UP vs Renusagar Power Co. and Ors
Writ Petition (Civil) 3921 of 1982
Date of judgment: 28-07-1988

In this case law, you will learn about the facts, issues, arguments, and judgment of the State of UP and Ors. vs Renusagar Power Co. and Ors.

Introduction

The idea of lifting the corporate veil was employed in the case of the State of UP and Ors. vs Renusagar Power Co. and Ors. to determine whether the same person was responsible for generating and consuming the electricity and, if so, whether the corporate veil was lifted in this case.

The question arises because the relation of Hindalco and Renusagar are inseparably or significantly closely tied in this instance. Renusagar had no distinct identity from the Hindalco since they were so inextricably intertwined. Renusagar, unlike Hindalco, was not an autonomous body.

Facts of the Case

Renusagar Power was established by a company named Hindalco, which is in the industrial business of aluminium production. The purpose for which Renusagar was established was to supply electrical power to Hindalco for production.

Even though Renusagar possesses its own articles and memorandum of association as a separate incorporation, it is still controlled by Hindalco. The shareholders for both companies were the same people who were also parties to the suit.

The state of Uttar Pradesh levied electrical duty for a massive amount on Renusagar for providing energy supply to Hindalco for industrial purposes under section 3 of the UP Electrical (Duty) Act, 1952, which states, “Levying of Electricity Duty”:

“The State Government may, in the public interest, having regard to the prevailing charges for supply of energy in any area, the generating capacity of any plant, the need to promote industrial production generally or any specified class thereof and other relevant factors, either fix different rates of electricity duty in relation to different classes of consumption of energy or allow any exemption from the payment thereof.”

Renusagar, under section 3(4) of the UP Electrical (Duty) Act, 1952, filed an application to the state government asking for exemption on duty as the activities carried by them were done in the interest of the public as per the provision mentioned above.

The state government rejected their application multiple times and gave different reasons for not granting the exception. This rejection by the state government resulted in the respondent’s constant aggravation, so they approached the High Court by filing a writ petition.

The High Court allowed the writ petition and held that the state government’s orders were impugned and not maintainable in law. The High Court asked the state government to reconsider their exemption application again concerning the direction issued by them. And now the petitioners were aggrieved (unhappy) by the judgment given by the High Court, and because of this, the state government filed a special leave petition in the Supreme Court of India, which sought relief.

Issues Raised

There were two major issues raised in this case:

1. Whether Renusagar’s generation of power will be considered as its own source of power for Hindalco as per section 3(1)(c) of the UP Electrical (Duty) Act, 1952, and are they obligated to pay the electrical duty?
2. Whether the corporate veil must be pierced to ascertain whether they are eligible for exemption from electricity duty under section 3(4) of the UP Electrical (Duty) Act, 1952.

Arguments

These were the arguments advanced by both appellants and respondents.

Arguments Given by the Appellants

The two companies are distinct entities with separate legal entities, and their revenues and balances are computed and reported differently. As a result, there is no need to pierce the corporate veil because there is no legal or factual reason to believe that the Renusagar plant is Hindolca’s sole source of energy.

Even though the parent company owns the subsidiary company entirely for tax reasons, they are still recognized as two distinct legal entities. In addition, the corporate veil should be lifted when the company is established to avoid legal requirements.

Arguments Given by the Respondents

1. The state government guaranteed that a sufficient and constant supply of electricity would be provided at a cheap rate for the production of aluminium. Since electricity served as a raw material for the production of aluminium, respondent no. 2 (Hindalco, short for M/s Hindustan Aluminium Corporation Ltd.) decided to set up the aluminium plant.

2. On agreeing to the following guidelines below, respondent no. 2 was allowed to expand the plant’s size:

• The respondent itself should install the aluminium plant.
• The state government has the right to take over the said plant.
  Therefore, a 100% owned subsidiary was established by respondent number 2 to supply electricity exclusively to him, preventing any complications from arising in the event of a takeover.

3. The licenses introduced in the Indian Electricity Act of 1910 are unassociated with respondent no. 1 (Renusagar Power Company Ltd.) and are bound to solely supply electricity to respondent no. 2, which means that he is not an independent entity but a confined source. Hence, the sanctions provided to respondent number 1 are different.

4. All three clauses of section 3(1) of the UP Electrical (Duty) Act, 1952, must be read harmoniously. If any contradistinction is made, it will prove to be ridiculous, further violating equality before the law that is Article 14 of the Constitution of India. Hence, section 3(1)(a) and section 3(1)(c) of the UP Electrical (Duty) Act, 1952, must not clash but preserve each other’s motives.

5. Lastly, respondent number 1 must be pleaded as the alter ego of respondent number 2. As per section 3(1)(c) of the UP Electrical (Duty) Act, 1952, respondent no. 2 has his own source of power.

Judgment

The Supreme Court upheld the High Court’s judgment in lifting the corporate veil. The court stated the appellants were at fault for not treating respondent no. 2 as the parent company of respondent no. 1, that is, Renusagar, the subsidiary of Hindalco, which provided its “own source of a generation.”

The court held that, given the facts of the case, lifting the corporate veil was the right move.

Further, Renusagar and Hindalco are to be seen as one unit, and so forth; the usage of electricity by Hindalco is to be seen as the consumption of power from its “own source of generation.”

While dismissing the appeal, the court ordered the state authority to regard the company’s true owner while imposing the duty.

Critical Analysis

The doctrine of the lifting of the corporate veil, as first exercised in the Salomon vs Salomon case and for the first time in India in the case of LIC vs Escort Limited, is a principle that helps the courts look beyond the standard structure of the company by breaking its corporate shell and take action as if no separate personality existed from their shareholder, making the persons controlling the company accountable for their wrongful actions.

To solve the issues at hand, the courts first looked into the relationship between the two companies, namely Renusagar and Hindalco:

1. They first emphasized how the condition of power generation was fulfilled; apparently, Hindalco made Renusagar for supplying power to expand their business of aluminium production.
2. The fact that Renusgar was wholly owned and controlled by Hindalco makes it the parent company. Therefore, the latter was taking part in the company’s daily affairs and industrial production decisions.
3. The fact that, at no point in time, Renusagar indicate any independent choice from its parent company.

These three observations imply that Renusagar and Hindalco, though separate legal entities, share the relationship of a parent-subsidiary agency. After lifting the corporate veil, the two companies are indeed under one concern, and the fact that Renusagar is providing electrical power to Hindalco is to be treated as producing electricity from its own source. Based on the abovementioned things, they will be liable to pay the electricity duty levied on them.

Coming to the issue of whether they will be granted the exemption or not, the answer is yes; they will be awarded the exemption, as it is well established that after lifting the corporate veil and not considering the identities of the two companies as separate, they will be eligible to get an exemption (from electricity duty) under section 3(4) of the UP Electrical (Duty) Act, 1952.

However, this provision does not define the exact extent of the power of the state government regarding this provision.

Hindalco’s subsidiary company, Renusagar Power, was wholly owned by Hindalco. Hindalco used the electricity of its subsidiary company, and like this, it availed the advantage of the reduced rate of electricity duty under the UP Electricity (Duty) Act, 1952.

Though Renusagar and Hindalco continued to have separate legal existences even after the judgment was passed, even after lifting the corporate veil, their different legal identities were not discarded by their directors or shareholders.

One of the crucial points to note here is that we know that parent companies create subsidiaries to escape liability or tax exemption, but parent company assets can be subject to the liabilities of the subsidiary; thus, piercing the corporate veil would be applied.

In this case, piercing the corporate veil played to the advantage of Hindalco. Based on the court’s reasoning, they got the exemption on electricity duty after the piercing.

Conclusion

It is concluded that the Supreme Court was perfectly correct in partially quashing the High Court’s ruling. However, the corporate veil should be raised in this instance because it is in the interest of justice, and it is the court’s duty to serve justice.

Furthermore, the entire situation demanded an explanation since the state government was already treating the subsidiary company as part and parcel of the parent company by shutting off power and other services but was unwilling to acknowledge the same on paper. So, in such instances, the judiciary must determine what is required of the hour, and in this case, there was definitely a need.

Also, the executive has a significant responsibility to maintain a balance between the interests of companies and the interests of the general public. The executive is found to do so because the executive cannot make decisions based solely on the interests of one party; instead, the executive must consider both interests. Companies must make sacrifices when the public interest is at the centre of any action because the legislature will favour the public.

Read Next: 13 Characteristics of a Company – Companies Act, 2013

State of UP vs Renusagar Power Co. and Ors – Case Explained in Easy Words
Gayatri Singh

In this law note, you will read about the Companies Act of 1956 and the Companies Act of 2013 with their amendments and differences.

Origin and Introduction

The word “company” is taken from the Latin word Com, which means with or together and panis, which means bread. As a result, it originally meant an association of people who ate together.

In the past, merchants used ceremonial gatherings to discuss business matters. Nowadays, business matters have become complicated and cannot be discussed in formal meetings. The corporate form of the organisation, therefore, gained more importance.

In the vernacular, society refers to an association of liked-minded persons formed to carry on some trade or business.

A company is a legal entity and a corporate body with a status and personality that is distinct and separate from the members that make it up. For example, Reliance is a company, and Mr Mukesh Ambani is its member/shareholder. Reliance (a company) ≠ Mr Mukesh Ambani.

According to the Companies Act 2013, “company” means a company incorporated according to this Act or according to the previous law of commercial companies.

According to common law, a company is a “juristic person” or “legal entity” which is able to survive outside the lives of its members. A company is a legal instrument to achieve a social and economic goal. It is, consequently, a mixture of political, social, monetary and statutory institutions.

Lord Justice Lindley defined a company as “an association of many persons who contribute money or money’s value to ordinary shares and use them in some trade or business, and who share in the profits and losses arising therefrom.”

The ordinary shares invested in this way are denominated in money and are the capital of the company.

There are members who are the individuals who participated in it, make it up, or to whom it belongs. The percentage of capital to which each member is entitled is his “share”. Shares are the entity which can be transferred, but their right to transfer can be limited as well.

Companies Act, 1956

Companies play a huge role in any developing economy. The Companies Act of 1956 was enacted not only from a legalistic, calculative and scientific point of view but also based on the young nation’s social and economic needs to ensure economic growth. It was introduced mainly to regulate the establishment, operation, financing and dissolution of companies.

Salient Features of Companies Act, 1956

The Companies Act of 1956 constitutes the company law in India. It came into force with effect from 1 April 1956. It is a consolidation act which represents the entire body of company law in its complete form and repeals the earlier Companies Act and its later amendments.

This Companies Act was largely based on the recommendations of the Company Law Committee (Bhabha Committee), which submitted its report in March 1952. This Act was the longest Act ever passed by our Parliament. Changes may be made to this law. The Companies Act 1956 consisted of 658 sections and 15 schedules.

Section 3 of the Act describes the definition of a company, and the types of companies that can be established, e.g. public, private, holding, subsidiary, joint-stock, unlimited, etc.

Further, Article 10E explains the constitution of the board of directors, explains the names of the companies, jurisdictions, tribunals, memoranda and changes that can be made.

Article 26 onwards explains the company’s articles of association.

Articles 53 to 123 explain shares, shareholders’ rights, explains bonds, share capital, the procedure of how share capital will be distributed, and powers within the company.

Articles 146 to 251 explain the management and administration of the company and the provisions on the registered office and name.

Articles 252 to 323 elaborate the provisions on the duties, powers, responsibilities and accountabilities of directors in a company.

Articles 391 to 409 explain arbitration, prevention and possession of a company.

Articles 425 to 560 explain the procedure for the dissolution of the company, restrictions on the rights of shareholders and the rights of creditors, methods of liquidation, compensation provided and methods of dissolution of the company.

Article 591 explains the formation of companies outside India and their fees and registration procedure, and everything else.

In India, the Companies Act of 1956 was the most important piece of legislation that empowered the central government to regulate the formation, financing, functioning and winding up of companies. This law contains organizational, financial and managerial mechanisms, all relevant aspects of the company. The Companies Act 1956 has been amended from time to time in response to the changing business environment.

Companies Act, 2013

The Companies Act of 2013 finally replaced the Act of 1956. The Act gave more powers to shareholders and also focused on women empowerment by mandating the inclusion of at least one woman on the board of directors of every prescribed class of companies in India.

The main objective of the Companies Act 2013 was to reduce bureaucratic red tape and remove the constant hurdles faced by businesses and start-ups during and after incorporation.

The Companies Act 2013 aims to reduce the number of government approvals and strengthen the self-regulation of companies to ensure that companies can operate quickly and enable them to be competitive players in the global economy.

Salient Features of the Companies Act, 2013

The Companies Act 2013 governs the incorporation, liability of directors and winding up of companies. The 2013 Act partially replaced the Companies Act of 1956 after receiving the assent of the President of India in August 2013 and came into force on 30 August 2013.

The Companies Act of 2013 is divided into 29 chapters that have 470 sections as against 658 sections in its predecessor and has seven schedules. In the Companies Act 2013, 188 sections of the old Companies Act were deleted.

The Companies Act 2013 also allowed for cross-border mergers (Indian companies merging with foreign companies) with the permission of the RBI.

The 2013 law introduced the term “dormant companies”, which refers to entities that have not been in business for two consecutive years.

It established the National Company Law Tribunal, a quasi-judicial body to adjudicate various issues relating to companies. This body also replaced the Board for Company Law.

The limit of 18 months for the holding of the Annual General Meeting (AGM) from the date of establishment was decreased to 9 months.

The number of directors was increased, and now it can be 20. Only One person can become a director of a maximum of 20 companies, but he/she cannot be a director of more than 10 public companies at the same time.

The Companies Act 2013 provides that aggrieved parties can set off only punishable offences under section 441 of the Companies Act, 2013, and an offence punishable by fine or imprisonment or compoundable will be settled with the permission of a special court.

Why Was There a Need to Replace the Companies Act of 1956 With the Companies Act of 2013?

A dramatic turn of events occurred in the 1990s when India opened up to the world through liberalisation, globalisation and privatisation. This led to rapid changes in the corporate sector in India, which the old Companies Act could not sustain. Some amendments were made, but they did not help much.

The new Company Act of 2013 had fewer sections (470); many sections were new and obsolete sections of the Companies Act, 1956 were deleted.

The Act gave more power to shareholders and also aimed at empowering women by making it mandatory to include at least one woman as a director on the board of every prescribed class of companies in India.

A new concept of corporate social responsibility was introduced, and a new National Company Law Tribunal (NCLT) was also set up to reduce the burden on the Courts while providing speedy justice.

Major Amendments So Far in Companies Act of 2013

The corporate sector in India is constantly changing, and this can be understood from the fact that four amendments have already been made in the new Companies Act of 2013.

The first amendment was in 2015, followed by amendments in 2017 and 2019, with the last being in 2020. These changes were made to address issues raised by critics and bring some new changes to the corporate sector in India.

Features of Companies (Amendments) Act, 2015

No company shall declare a dividend without setting off the losses and depreciation of the previous year or years against the profits of the current year.

The common seal has become optional and agreements can now be signed directly between two directors.

Notification of fraud by the auditor to the central government in case the amount exceeds the prescribed amount (currently Rs 1 million or more).

Features of Companies (Amendments) Act, 2017

Matters which must be settled by “Postal Ballot” may be settled by “Electronic Ballot” as far as the company is concerned.

A company’s ‘CSR Committee,’ which may not have an ‘Independent Director,’ will have two or more directors on its CSR Committee.

Penalties have been rationalised, i.e. penalties will now be levied taking into account the size of the company, nature of business, injury to the public interest, nature and severity of default, the reputation of non-performance etc.

Features of Companies (Amendments) Act, 2019

It reduced the burden on the NCLT by devolving certain approvals to the central government, such as converting a public company into a private company and changing the financial year.

No one can be a director of more than 20 companies, of which more than 10 organizations can not be public companies.

This new amendment made corporate social responsibility (CSR) mandatory. And if the companies were unable to spend the said amount on CSR, then they had to contribute it to the funds listed in Annex VII, for example, the national PM relief fund.

Features of Companies (Amendments) Act, 2020

A provision was inserted in section 2(52) of the Companies Act 2013, excluding certain classes of companies from the definition of a listed company (in particular, to remove companies which are listed for debt securities only).

The CSR framework has been released. The Amendment Act 2020 exempts companies with CSR responsibilities up to INR 50 million per annum from setting up a CSR committee.

A lesser financial penalty will be imposed on a start-up company, manufacturing company, sole proprietorship or small company for non-compliance with the provisions of the Companies Act 2013, which is accompanied by monetary penalties.

Conclusion

The amendment adopted in the legislation used to be reactive in nature, e.g. the main amendments were a reaction to the global phenomenon of
i. the era of colonisation,
ii. Post-World War I period, and
iii. Opening of Indian markets in 1990.

However, the recent amendments are more proactive in nature and seek to make the legislation more effective, keeping in view the dynamics of society.

While we have touched on a few key factors that marked a major change between the 2013 Act and the 1956 Act, we must understand that the main objective of revising the Companies Act was basically to remove several loopholes that existed in the earlier Act. Simple and repeated amendments did not solve the problem as expected. The aim of the new law was to establish a corporate democracy in which the companies concerned would be given much more freedom to manage their own affairs without government approval or permission.

After privatisation, the Government of India felt that corporate liberalisation was the need of the day and took the initiative by introducing a new statute. Finally, it approved several amendments to ensure that companies run more smoothly with less government interference while increasing the accountability of companies for their actions.

Read Next:
1. 13 Characteristics of a Company – Companies Act, 2013
2. Types and Classification of Company Under Companies Act, 2013
3. What Is Winding Up of a Company by the Court

Companies Act of 1956 and 2013 Explained With Differences and Amendments
Guest Author