The Hindu Business Line : Share of incongruity

THE definition of a `private company' as per Section 3(1) (iii) of the Companies Act, 1956 was amended vide Companies (Amendment) Act, 2000 with effect from December 13, 2000, to mean a company which has a minimum paid-up capital of Rs 1 lakh in addition to other restrictive requirements as per its articles of association (AoA). Similarly, the definition of `public company' as per Section 3(1)(iv) was amended by the Companies (Amendment) Act, 2000 effective December 13, 2000, to mean a company which has a minimum paid-up capital of Rs 5 lakh. In a nutshell, the impact of these amendments would mean that every private company shall have a minimum paid-up capital of Rs 1 lakh and every public company shall have a minimum paid-up capital of Rs 5 lakh. In view of these specific definitions, no company can be called a private company or a public company if it does not have share capital. But this goes against the spirit of Section 12 of the Companies Act, 1956.

Also, in this context it is not very clear as to how the already existing expression "unless the context otherwise requires" as per Section 3(1) would be of any rescue so as to include the companies without share capital within the purview of `private company' or `public company'.

According to Section 12(2), a private/public company may fall under any of the following categories:

A company having the liability of its members limited by the memorandum to the amount, if any unpaid on the shares respectively held by them — termed as "company limited by shares".

A company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake by the memorandum to contribute to the assets of the company in the event of its being wound-up — termed as "company limited by guarantee."

A company not having any limit on the liability of its members — termed as "Unlimited company."

In terms of Section 13 (1), memorandum of every company shall state the name of the company with `Limited' as the last word of the name in the case of a public limited company and with "Private Limited" as the last words of the name in the case of a private limited company. Section 13(1) requires the memorandum of a company limited by shares or by guarantee shall also state that the liability of its members is limited.

Section 37 (1) deals with a company limited by guarantee and not having a share capital.

As per Section 160 of the Companies Act, 1956, which deals with filing of annual return by a company not having share capital, Form 21A of the Companies (Central Government's) General Rules and Forms, 1956 has to be filed with the Registrar of Companies (RoC) within 60 days from the date of its annual general meeting (AGM).

Schedule I to the Companies Act specifies specimen Memorandum and Articles of Association for the following types of companies: a) company limited by shares — Table A, Table B; b) company limited by guarantee and not having share capital — Table C; c) company limited by guarantee and having share capital — Table D; and d) unlimited company — Table E.

Schedule X of the Companies Act prescribes the Table of Fees to be paid to the RoC separately for a company having a share capital and for a company not having a share capital.

Rule 2 of the Companies (Fees on Applications) Rules, 1999 specifies the amount of fees to be paid by a company limited by guarantee but not having a share capital

In addition to the above, a couple of Sections in the Companies Act contain provisions pertaining to companies not having a share capital.

An analysis of the various provisions of Companies Act implies that a company can be formed without share capital. Thus a company limited by guarantee but not having a share capital can be legally incorporated under the Companies Act either as a private or public company.

Taking into consideration this legal background, by the amendment of the definition of "private company" and "public company" by the Companies (Amendment) Act, 2000 with effect from December 13, 2000, it appears that neither a private company nor a public company can be formed without share capital. But this goes against the legal provisions as specified in Section 12, Schedule I and Schedule X of the Companies Act.

In spite of the amendment in the definition as aforementioned, it appears that as per current practice, Form 1 of the Companies (Central Government's) General Rules and Forms, 1956 which is a declaration of the compliance with the requirements of the Companies Act for registration of the company is also filed without fulfilling the requirements of the paid-up capital on the date of registration.

Similarly, it seems that the certificate of incorporation of the company is also issued by the RoC without compulsorily verifying and satisfying the compliance of the minimum paid-up share capital requirements, as in none of the Forms submitted with the RoC at the time of registration the information on the paid-up share capital is obtained.

It is only when the Return of Allotment in Form No. 2 of the Companies (Central Government's) General Rules and Forms is filed at a later stage, information flows to the RoC about the amount paid-up on the shares in respect of a particular company. The crux of the issue is that as on the date of incorporation of a new company whether the company has the minimum amount of paid-up capital as stipulated by law cannot be easily ascertainable. In the absence of suitable mechanism to implement this requirement and to verify the same, it is difficult to conclude that the amendment of the definition of private and public companies has been given strictly effect to for newly incorporated companies.

It seems that this anomaly in the definition of private company and public company has been overlooked so far and also in the Concept Paper and the Concept Rules proposed by the Ministry of Company Affairs. This has to be rectified forthwith by a suitable amendment to the Companies Act considering the practical and realistic way of implementing the requirements of minimum paid-up capital.

(The author is a Chennai-based chartered accountant.)

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