it can be bound by only those documents which bear its signature.

Therefore, the law has

provided for the use of common seal, with the name of the company engraved on it, as a
substitute for its signature. Any document bearing the common seal of the company will be

legally binding on the company. A company may have its own regulations in its Articles of

Association for the manner of affixing the common seal to a document. If the Articles are

silent, the provisions of Table-A (the model set of articles appended to the Companies Act)

will apply. As per regulation 84 of Table-A the seal of the company shall not be affixed to

any instrument except by the authority of a resolution of the Board or a Committee of

the Board authorized by it in that behalf, and except in the presence of at least two

directors and of the secretary or such other person as the Board may appoint for the

purpose, and those two directors and the secretary or other person aforesaid shall sign
every instrument to which the seal of the company is so affixed in their presence.

6. Limited Liability : A company may be company limited by shares or a

company limited by guarantee. In company limited by shares, the liability of members is

limited to the unpaid value of the shares. For example, if the face value of a share in a

company is Rs. 10 and a member has already paid Rs. 7 per share, he can be called upon

to pay not more than Rs. 3 per share during the lifetime of the company. In a company
limited by guarantee the liability of members is limited to such amount as the member may

undertake to contribute to the assets of the company in the event of its being wound up.

7. Transferable Shares. In a public company, the shares are freely transferable.

The right to transfer shares is a statutory right and it cannot be taken away by a provision
in the articles. However, the articles shall prescribe the manner in which such transfer of

shares will be made and it may also contain bona fide and reasonable restrictions on the
right of members to transfer their shares. But absolute restrictions on the rights of

members to transfer their shares shall be ultra vires. However, in the case of a private

company, the articles shall restrict the right of member to transfer their shares in

companies with its statutory definition.

In order to make the right to transfer shares more effective, the shareholder can apply

to the Central Government in case of refusal by the company to register a transfer of shares.

8. Separate Property : As a company is a legal person distinct from its members,

it is capable of owning, enjoying and disposing of property in its own name. Although its
capital and assets are contributed by its shareholders, they are not the private and joint

owners of its property. The company is the real person in which all its property is vested

and by which it is controlled, managed and disposed of.

9. Delegated Management : A joint stock company is an autonomous, self-

governing and self-controlling organization. Since it has a large number of members, all of
them cannot take part in the management of the affairs of the company. Actual control

and management is, therefore, delegated by the shareholders to their elected

representatives, know as directors. They look after the day-to-day working of the

company. Moreover, since shareholders, by majority of votes, decide the general policy of

the company, the management of the company is carried on democratic lines. Majority
decision and centralized management compulsorily bring about unity of action.
1.4 DISTINCTION BETWEEN COMPANYAND PARTNERSHIP

The difference between a company and partnership is as follows:

Company Partnership
1. Mode of creation By Registration by By Agreement
Statute.

2. Legal Statute Legal entity distinct Firm and partners

from members, are not separate; no

perpetual succession. separate entity;

uncertain life
3. Liability Limited liability of Unlimited joint and

members several liability of

partners

4. Authority Divorce between Right to share mana

ownership and gement, common and

management ownership and

Representative Management.

Management Mutual agency -

Implied authority.
5. Transfer Public Co.-freely Ordinarily no right of

of shares transferable; transferee transfer of share by a

gets all the rights of partner-limited rights

the transferor of transferee
6. Number of Private Co-Minimum 2 Minimum 2
members and Maximum 50 Maximum 20.

public Co. Minimum7

and Maximum unlimited.

7. Resources Large and unlimited Personal resources of

resources partners are limited.

8. General Memorandum defines Easy to change the

powers and confines the scope agreement and so also

of the company. the powers of the

alteration difficult. partners.

9. Legal Statutory books, No legal formalities

formalities Audit, Publication Registration not

Registration, compulsory. No audit,

filing, etc. lots of legal no publication of

formalities accounts etc.

10. Dissolution Only according to the Dissolution by

provisions of law- agreement by

usually by an order of notice, by court.

the court. Death of a partner

Death of a share- may mean dissolution

holder does not of partnership

affect the existence

of a company.
1.5 TYPES OF COMPANY

Joint stock company can be of various types. The following are the important types of
company:

1. Classification of Companies by Mode of Incorporation

Depending on the mode of incorporation, there are three classes of joint stock

companies.

A. Chartered companies. These are incorporated under a special charter by a

monarch. The East India Company and The Bank of England are examples of chartered
incorporated in England. The powers and nature of business of a chartered company are

defined by the charter which incorporates it. A chartered company has wide powers. It

can deal with its property and bind itself to any contracts that any ordinary person can. In

case the company deviates from its business as prescribed by the charted, the Sovereign

can annul the latter and close the company. Such companies do not exist in India.
B. Statutory Companies. These companies are incorporated by a Special Act passed

by the Central or State legislature. Reserve Bank of India, State Bank of India, Industrial
Finance Corporation, Unit Trust of India, State Trading corporation and Life Insurance

Corporation are some of the examples of statutory companies. Such companies do not have

any memorandum or articles of association. They derive their powers from the Acts

constituting them and enjoy certain powers that companies incorporated under the

Companies Act have. Alternations in the powers of such companies can be brought about by

legislative amendments.
 The provisions of the Companies Act shall apply to these companies also except in so far

as provisions of the Act are inconsistent with those of such Special Acts [Sec 616 (d)]
These companies are generally formed to meet social needs and not for the purpose of
earning profits.

C. Registered or incorporated companies. These are formed under the Companies

Act, 1956 or under the Companies Act passed earlier to this. Such companies come into

existence only when they are registered under the Act and a certificate of incorporation

has been issued by the Registrar of Companies. This is

the most popular mode of incorporating a company. Registered companies may further be

divided into three categories of the following.

i) Companies limited by Shares : These types of companies have a share capital

and the liability of each member or the company is limited by the Memorandum to the

extent of face value of share subscribed by him. In other words, during the existence of the

company or in the event of winding up, a member can be called upon to pay the amount
remaining unpaid on the shares subscribed by him. Such a company is called company

limited by shares. A company limited by shares may be a public company or a private

company. These are the most popular types of companies.

ii) Companies Limited by Guarantee : These types of companies may or may not
have a share capital. Each member promises to pay a fixed sum of money specified in the

Memorandum in the event of liquidation of the company for payment of the debts and
liabilities of the company [Sec 13(3)] This amount promised by him is called
 ‘Guarantee’. The Articles of Association of the company state the number of member with

which the company is to be registered [Sec 27 (2)]. Such a company is called a company
limited by guarantee. Such companies depend for their existence on entrance and

subscription fees. They may or may not have a share capital. The liability of the member

is limited to the extent of the guarantee and the face value of the shares subscribed by

them, if the company has a share capital. If it has a share capital, it may be a public

company or a private company.

The amount of guarantee of each member is in the nature of reserve capital. This amount

cannot be called upon except in the event of winding up of a company. Non-

trading or non-profit companies formed to promote culture, art, science, religion,

commerce, charity, sports etc. are generally formed as companies limited by guarantee.

iii) Unlimited Companies : Section 12 gives choice to the promoters to form a

company with or without limited liability. A company not having any limit on the liability of its
members is called an ‘unlimited company’ [Sec 12(c)]. An unlimited company may or

may not have a share capital. If it has a share capital it may be a public company or a private

company. If the company has a share capital, the article shall state the amount of share

capital with which the company is to be registered [Sec 27 (1)]

The articles of an unlimited company shall state the number of member with which

the company is to be registered.

II. On the Basis of Number of Members

On the basis of number of members, a company may be :

(1) Private Company, and (2) Public Company.

A. Private Company
According to Sec. 3(1) (iii) of the Indian Companies Act, 1956, a private company is

that company which by its articles of association :

i) limits the number of its members to fifty, excluding employees who are
members or ex-employees who were and continue to be members;

ii) restricts the right of transfer of shares, if any;

iii) prohibits any invitation to the public to subscribe for any shares or
debentures of the company.

Where two or more persons hold share jointly, they are treated as a single member.

According to Sec 12 of the Companies Act, the minimum number of members to form

a private company is two. A private company must use the word “Pvt” after its name.

Characteristics or Features of a Private Company. The main features of a private of a

private company are as follows :

i) A private company restricts the right of transfer of its shares. The shares

of a private company are not as freely transferable as those of public

companies. The articles generally state that whenever a shareholder of a Private

Company wants to transfer his shares, he must first offer them to the existing

members of the existing members of the company. The price of the shares is

determined by the directors. It is done so as to preserve the family nature of the

company’s shareholders.
 ii) It limits the number of its members to fifty excluding members who are

employees or ex-employees who were and continue to be the member. Where

two or more persons hold share jointly they are treated as a single member. The

minimum number of members to form a private company is two.

iii) A private company cannot invite the public to subscribe for its capital or

shares of debentures. It has to make its own private arrangement.

B. Public company
According to Section 3 (1) (iv) of Indian Companies Act. 1956 “A public
company which is not a Private Company”,
If we explain the definition of Indian Companies Act. 1956 in regard to the
public company, we note the following :
i) The articles do not restrict the transfer of shares of the company
ii) It imposes no restriction no restriction on the maximum number of the
members on the company.
iii) It invites the general public to purchase the shares and debentures of the
companies
(Differences between a Public Company and a Private company)
1. Minimum number : The minimum number of persons required to form a public
company is 7. It is 2 in case of a private company.
2. Maximum number : There is no restriction on maximum number of members in a
public company, whereas the maximum number cannot exceed 50 in a private company.
3. Number of directors. A public company must have at least 3 directors whereas a
private company must have at least 2 directors (Sec. 252)
4. Restriction on appointment of directors. In the case of a public company, the
directors must file with the Register a consent to act as directors or sign an
undertaking for their qualification shares. The directors or a private company need
not do so (Sec 266)
5. Restriction on invitation to subscribe for shares. A public company invites the
general public to subscribe for shares. A public company invites the general public to

subscribe for the shares or the debentures of the company. A private company by its

Articles prohibits invitation to public to subscribe for its shares.

6. Name of the Company : In a private company, the words “Private Limited” shall be

added at the end of its name.

7. Public subscription : A private company cannot invite the public to purchase its
shares or debentures. A public company may do so.
8. Issue of prospectus : Unlike a public company a private company is not expected to issue

a prospectus or file a statement in lieu of prospectus with the Registrar before allotting

shares.

9. Transferability of Shares. In a public company, the shares are freely transferable (Sec.
82). In a private company the right to transfer shares is restricted by Articles.

10. Special Privileges. A private company enjoys some special privileges. A public
company enjoys no such privileges.

11. Quorum. If the Articles of a company do not provide for a larger quorum. 5
members personally present in the case of a public company are quorum for a

meeting of the company. It is 2 in the case of a private company (Sec. 174)

12. Managerial remuneration. Total managerial remuneration in a public company cannot

exceed 11 per cent of the net profits (Sec. 198). No such restriction applies to a

private company.

13. Commencement of business. A private company may commence its business

immediately after obtaining a certificate of incorporation. A public company cannot

commence its business until it is granted a “Certificate of Commencement of business”.

Special privileges of a Private Company

Unlike a private a public company is subject to a number of regulations and

restrictions as per the requirements of Companies Act, 1956. It is done to safeguard the

interests of investors/shareholders of the public company. These privileges can be studied

as follows :

a) Special privileges of all companies. The following privileges are available to

every private company, including a private company which is subsidiary of a public

company or deemed to be a public company :

1. A private company may be formed with only two persons as member. [Sec.12(1)]
2. It may commence allotment of shares even before the minimum subscription is

subscribed for or paid (Sec. 69).

3. It is not required to either issue a prospectus to the public of file statement in lieu of
a prospectus. (Sec 70 (3)]

4. Restrictions imposed on public companies regarding further issue of capital do not

apply on private companies. [Sec 81 (3)]