Business law deals with commercial matters and whatever happens in a business. It is a body of law governing commerce and business and is deemed to be a branch of civil law. Business law comprises both private and public law. Commercial law mainly regulates the following aspects:
Corporate contracts
Hiring practices
Manufacture and sale of commercial goods
The business laws have evolved and changed with the advent of technology and society. In this article, we will find an introduction to business law and learn about its types and features.
What is a Company
An introduction to business law entails learning first about what is meant by a company. Forming an organization means a huge amount of investments. With huge investments also come huge risks. A partnership is often constrained by limited resources and a lot of liabilities for the partners. To overcome the issues of the partnership business, the company form of business came into existence. The famous multinational companies have their investors spread all over the world.
The companies act of 1956 defines a company as a voluntary association of people which is formed for a common purpose. The capital invested in the company is divisible by parts, called shares. The liability of partners is limited in a company. A company is often regarded as an artificial person or a human being created by the law but without any physical existence.
Common Types of Company
All companies must register under the companies' act. Some of the most common types of companies are:
Private Company – The shareholders of this type of company are not allowed to transfer their shares. In case any transfer of shares is allowed, the number of shareholders gets limited to under 50 (excluding employees and shareholders). An individual can gain full control of private companies. The minimum paid capital in private companies is one lakh INR.
Public Company – In a public company, the minimum capital paid up is five lakh INR. A minimum of seven people can form a public company, and it must have three directors. There is no curtailment on the maximum number of people in a public company.
Government Companies – A company is defined as a government company under section 617 when more than 50% of the share capital is owned by the central government or any state government(s). It could also be partly owned by the central government and partly by one or more state governments.
Evolution of the Modern Company Law
The origin of company laws in India is intricately linked with English company laws. The various Companies acts passed from time to time in India have followed the British laws with slight modifications.
The Companies act of 1956 followed the company's act of the U.K in 1948.
In London, the most ancient existence of business associations dates to the 11th and 13th centuries. Back then, businesses were called “merchant guilds”.
These guilds would obtain charters from the crown using which they could obtain a monopoly over any trade or commodity.
There were mainly two kinds of companies in that era:
Commenda – This was like a partnership where the financer was a sleeping partner with limited liability. The working partners bore the liability mostly.
Societas – In this type of business, all the members of the partnership took part in managing the business. They had unlimited liability, and this was more like the present partnership.
In India, the first legislative enactment for registration of Joint stocks company was passed in 1850 which recognized companies as distinct entities. The concept of limited liability was not recognized at that time.
The companies act of 1956 enabled companies in India to be formed by registration. It outlines the responsibilities of a company, its executive director and secretaries. It also provided the process by which a company could wind up its operations.
Major amendments were done to the company law in 2002. The company law board was replaced by the National Company Law Tribunal (NCLT) and appellate tribunal. Setting up NCLT reduced the burden on courts as it became a specialized institution for corporate justice.
The final major changes to the company law happened in 2013 and 2017, and its highlights were:
It defined a related party with respect to a company to include an investing company.
It changed the definition of a subsidiary as a company where the holding company controls how its board of directors is formed.
The associate company definition changed to mean a company in which the other company has a big influence, but it is not a subsidiary of the company.
[Image will be uploaded soon]
Lifting the Corporate Veil
The personality of a corporation is disparate from the personality of its shareholders. This is the concept behind the principle of the veil of incorporation. It is like a fictitious veil between the company and its members but not a wall. This concept came from the limited liability principle. However, this concept has led to fraudulent use of the veil by the company’s members and directors. Due to this, the court may lift or shatter the veil and treat the company and its owners as the same. This issue is most significant when the company is insolvent and creditors wish to pursue the assets of the owners. Few scenarios under which courts would pierce the corporate veil and disregard the corporate entity are:
Where it is essential to restore justice in the public interest
For the benefit of revenue
To find the character of a company, whether it is a friend or an enemy.
If a company is trying to avoid legal obligations
If a company is formed for fraudulent activities or to defeat the law
If the company is formed to act as agents of either its members or another company
[Image will be uploaded soon]
Role of Company Secretary in a Company
As per the Companies secretaries act of 1980 (sec2(1)c), a company secretary or CS in law is defined as a person who is a member of the institute of company secretaries in India (ICSI). The Companies act of 1956 has defined a secretary as a person who has the prescribed qualifications that are necessary to be performed by the secretary and the law also imposed certain statutory obligations on the role of a company secretary. The law, however, does not define the exact position of a CS.
Referring to the law of the land, the secretary is a servant of the company who is under full control of the board of directors of the company. As per the company act, it is mandatory for companies to have a minimum paid-up share of five crores INR for appointing key managerial positions of:
Company Secretary
Managing Director, CEO, or Whole-time Director
Chief Financial Officer
FAQs on CS Business Law Essentials
1. What is a company as per Indian law, and what are its essential characteristics?
A company is a voluntary association of people formed for a common purpose, registered under the Companies Act. It is considered an artificial legal person created by law. Its key characteristics include:
- Separate Legal Entity: It has an identity distinct from its members.
- Perpetual Succession: The company's existence is not affected by the death or departure of its members.
- Limited Liability: The liability of members is limited to the value of the shares they hold.
- Transferability of Shares: Shares can be transferred from one person to another (except in a private company).
- Common Seal: It acts as the official signature of the company.
- Capacity to Sue and Be Sued: A company can enter into legal proceedings in its own name.
2. What are the main types of companies in India based on liability and control?
The most common types of companies registered under the Companies Act are:
- Private Company: Restricts the right to transfer its shares and limits the number of its members to 200. It requires a minimum of two directors and cannot invite the public to subscribe to its securities.
- Public Company: A company that is not a private company. It can offer its shares to the public and has no restriction on the transfer of shares. It requires a minimum of seven members and three directors.
- Government Company: A company in which at least 51% of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments.
3. Why is a company considered a 'separate legal entity' from its owners or members?
A company is considered a separate legal entity because, upon incorporation, it is treated by the law as a distinct person with its own rights and obligations, separate from the individuals who own or manage it. This principle, established by law, means the company can own property, incur debts, and enter into contracts in its own name. The primary advantage is limited liability, where the personal assets of the members are protected from the company's debts.
4. What does it mean to 'lift the corporate veil', and under what circumstances is it done?
The 'corporate veil' is a legal concept that separates the personality of a company from the personality of its shareholders. 'Lifting the corporate veil' means the court disregards the company's separate identity and holds the members or directors directly liable for the company's actions. This is done to prevent the fraudulent use of the legal entity status. Courts may lift the veil in situations like:
- To determine the true character of the company (e.g., whether it is an enemy company).
- When the company is formed to commit fraud or avoid legal obligations.
- To protect government revenue or prevent tax evasion.
- Where the company is acting as an agent for its shareholders.
5. How does a Public Company differ from a Private Company regarding capital and members?
A Public Company and a Private Company differ significantly in terms of capital and membership rules:
- Members: A Private Company can have a minimum of 2 and a maximum of 200 members. A Public Company requires a minimum of 7 members but has no maximum limit.
- Capital Requirement: As per the Companies (Amendment) Act, 2015, the minimum paid-up capital requirement for both private and public companies has been removed. However, they must have adequate capital for their operations.
- Share Transfer: A Private Company restricts the transferability of its shares, whereas a Public Company's shares are freely transferable.
6. What is the defined role and importance of a Company Secretary (CS) in a company?
A Company Secretary (CS) is a key managerial person responsible for ensuring the company's compliance with all legal and regulatory requirements. As defined by the Companies Secretaries Act, 1980, a CS is a member of the ICSI. Their primary role is to act as the company's chief compliance officer, advising the board of directors on their legal responsibilities, ensuring good corporate governance, managing board meetings, handling shareholder communications, and maintaining statutory records.
7. What was the significance of establishing the National Company Law Tribunal (NCLT)?
The establishment of the National Company Law Tribunal (NCLT) was a significant reform in Indian company law. It replaced the Company Law Board (CLB) and consolidated the corporate jurisdiction that was previously spread across various bodies, including High Courts. The primary significance of the NCLT is that it created a specialised institution for corporate justice, leading to faster adjudication of company disputes, insolvency proceedings, and other corporate matters, thereby reducing the burden on regular courts.
