Companies Act basics

In short

The Companies Act, 2013 is the central law that governs how companies in India are formed, financed, managed and closed, replacing the Companies Act, 1956. It gives a company separate legal personality, limited liability, perpetual succession and a transferable interest, and in exchange imposes disclosure, audit and governance duties administered by the Ministry of Corporate Affairs (MCA) through the Registrar of Companies (ROC), with disputes before the NCLT. B.Com and BAF students meet it in Business/Corporate Law and Auditing papers; CA, CS and CMA papers test it heavily. Employers test it in placement rounds for audit, secretarial, compliance, banking credit and accounting roles, because every entry, filing and audit opinion ultimately rests on these provisions.

Explained

Nature of a company and key doctrines

• Company (Sec. 2(20)): a company incorporated under this or any earlier company law — an artificial legal person created by registration.
• Separate legal entity: the company is distinct from its members; established in *Salomon v. Salomon & Co. Ltd.* (1897) and in India in *Re Kondoli Tea Co.*
• Limited liability: a member's liability is limited to unpaid amount on shares (company limited by shares) or to the guaranteed amount (limited by guarantee); unlimited companies also exist.
• Perpetual succession: members may die or transfer shares; the company continues until legally wound up. Common seal is now optional.
• Lifting the corporate veil: courts/statute look behind the entity for fraud or improper conduct — *Daimler v. Continental Tyre* (enemy character), *Gilford Motor v. Horne* (evading obligation), tax evasion, sham companies; statutory instances include fraudulent conduct of business and officer-in-default liability.
• Company vs partnership vs LLP: partnership (Indian Partnership Act, 1932) has no separate entity and unlimited liability; LLP (LLP Act, 2008) has separate entity + limited liability but fewer compliances; company has the strictest disclosure and the easiest access to public capital.

Classification of companies

• By incorporation: statutory (created by an Act, e.g. RBI, LIC), registered (under the Act), chartered (historical).
• By liability: limited by shares; limited by guarantee (clubs, associations); unlimited company.
• By members: Private company (Sec. 2(68)) — minimum 2 members, maximum 200, restricted transfer of shares, "Private Limited" in the name; Public company (Sec. 2(71)) — minimum 7 members, no member ceiling; One Person Company (OPC) (Sec. 2(62)) — one member, one nominee, suffix "(OPC) Private Limited".
• Small company (Sec. 2(85)): a private company within prescribed paid-up capital and turnover thresholds — currently ₹4 crore paid-up capital and ₹40 crore turnover (raised by rules; verify the current notification). Enjoys lighter compliance: no cash-flow statement, fewer board meetings, abridged annual return.
• Holding, subsidiary and associate (Secs. 2(46), 2(87), 2(6)): subsidiary = control of composition of the Board or more than one-half of total voting power; associate = significant influence, generally 20% or more of voting power or a joint venture.
• Government company (Sec. 2(45)): not less than 51% paid-up capital held by Central/State Government(s) — CAG appoints/directs the auditor (Sec. 139(5)).
• Foreign company (Sec. 2(42)): incorporated outside India with a place of business in India (Chapter XXII filings).
• Section 8 company: non-profit for charity, education, science, art, etc.; profits ploughed back, no dividend, licence from the Central Government, may drop "Limited" from its name.
• Listed company (Sec. 2(52)): securities listed on a recognised stock exchange — also subject to SEBI (LODR) Regulations, 2015.
• Dormant and inactive company (Sec. 455); producer company (Chapter XXIA, for farmer-producers).

Formation and incorporation

1. Promotion: promoter (Sec. 2(69)) conceives the idea, arranges resources and takes preliminary steps; owes fiduciary duties and must disclose secret profits.
2. Name reservation: through SPICe+ Part A on the MCA portal — the name must not be identical or undesirable.
3. Documentation: SPICe+ Part B with e-MoA (INC-33), e-AoA (INC-34), AGILE-PRO-S (GST, EPFO, ESIC, bank account, profession tax), declarations in INC-9, DIN for directors, DSC for signatories.
4. Certificate of incorporation (Sec. 7(2)) with CIN; conclusive evidence of registration. PAN and TAN are issued with it.
5. Declaration before commencement of business (Sec. 10A): a company with share capital files INC-20A within 180 days confirming subscription money received and registered office verified.
6. Registered office (Sec. 12): in place within 30 days of incorporation and at all times thereafter; INC-22 filing; name, address, CIN, phone, e-mail, website on letterheads and business letters.
7. Pre-incorporation contracts do not bind the company (it did not exist) unless ratified/adopted under the Specific Relief Act, 1963; provisional contracts of a public company before Sec. 10A compliance.

Memorandum, articles and prospectus

• Memorandum of Association (MoA) (Sec. 4) — the charter defining the company's powers and relation with outsiders. Clauses: Name, Registered office (State), Objects, Liability, Capital, Subscription (and nominee clause for an OPC). Tables A–E of Schedule I give model forms.
• Articles of Association (AoA) (Sec. 5) — internal rules: share capital, calls, transfer, meetings, directors, dividends, borrowing. May contain entrenchment provisions needing stricter-than-special-resolution consent.
• MoA vs AoA: MoA is supreme; articles are subordinate and anything beyond the memorandum is void. Alteration of MoA (Secs. 13–18) needs a special resolution (and Central Government/ROC approval for object and State-to-State registered-office change); articles are altered by special resolution (Sec. 14).
• Doctrine of ultra vires: an act outside the objects clause is void and cannot be ratified even by all members (*Ashbury Railway Carriage v. Riche*); directors may be personally liable.
• Doctrine of indoor management (Turquand rule): an outsider dealing in good faith may assume internal procedures were complied with; exceptions — knowledge of irregularity, suspicious circumstances, forgery, negligence.
• Doctrine of constructive notice: MoA and AoA are public documents; outsiders are deemed to know them.
• Prospectus (Sec. 2(70), Secs. 23–42): any document inviting the public to subscribe to securities. Types — red herring (Sec. 32, without full price/quantum), shelf (Sec. 31, for banks/FIs), abridged (Sec. 33), deemed prospectus (Sec. 25, offer for sale). Misstatement attracts civil liability (Sec. 35) and criminal liability for fraud (Sec. 34 with Sec. 447). A private placement (Sec. 42) to identified persons, maximum 200 per financial year per security class, is not a public offer; statement in lieu is no longer used.

Share capital, members and dividends

• Capital terms: authorised (nominal) → issued → subscribed → called-up → paid-up; reserve capital; calls in arrear/advance.
• Kinds of shares (Sec. 43): equity (with voting rights, or with differential rights) and preference (preferential dividend and repayment; redeemable within 20 years, 30 years for infrastructure projects).
• Issue methods: public issue, rights issue (Sec. 62), bonus issue (Sec. 63, from free reserves/securities premium/capital redemption reserve — never from revaluation reserve), private placement, ESOP, sweat equity (Sec. 54), preferential allotment.
• Issue at discount prohibited (Sec. 53) except sweat equity and shares issued to creditors under a resolution plan; securities premium use is restricted by Sec. 52.
• Buy-back (Sec. 68): out of free reserves, securities premium or proceeds of a fresh issue; limit 25% of paid-up capital plus free reserves, and for equity in a financial year 25% of paid-up equity capital; post-buy-back debt-equity not above 2:1, capital redemption reserve created; 10% board-only route allowed.
• Reduction of capital (Sec. 66) requires a special resolution and NCLT confirmation.
• Members: register of members (Sec. 88), transfer and transmission (Sec. 56), dematerialisation now mandatory for all companies other than small/government ones for share issue and transfer (verify current rule), refusal of transfer appealable to NCLT.
• Dividend (Secs. 123–127): declared only out of current or past profits after depreciation, or out of money provided by Government; interim dividend by the Board; deposit in a separate bank account within 5 days; pay within 30 days of declaration; unpaid amounts to Unpaid Dividend Account within 7 days and to IEPF after 7 years.
• Debentures (Sec. 71): borrowed capital; no voting rights; may be convertible (with special resolution), secured by charge (registered under Sec. 77 within 30 days), with a debenture redemption reserve where required.
• Deposits (Secs. 73–76): private companies generally cannot accept deposits from the public; eligible public companies may, subject to credit rating, deposit trustees, a 20% deposit repayment reserve and DPT-3 filings.

Management, meetings and accounts

• Directors (Secs. 149–172): minimum 3 (public), 2 (private), 1 (OPC); maximum 15 (more by special resolution); at least one resident director staying 182 days or more in India; woman director for listed and prescribed public companies; independent directors — one-third of the Board for listed companies; DIN mandatory, maximum 20 directorships (10 public companies).
• Board powers (Sec. 179) exercised by resolution at meetings; restricted powers (Sec. 180) — selling an undertaking, borrowing beyond paid-up capital + free reserves + securities premium — need a special resolution. Related-party transactions (Sec. 188), loans to directors (Sec. 185), inter-corporate loans/investments (Sec. 186).
• KMP (Sec. 2(51)): MD/CEO/manager, whole-time director, CS, CFO; Sec. 203 mandates MD/CEO/manager + CS + CFO for prescribed companies.
• Committees: Audit Committee (Sec. 177), Nomination and Remuneration Committee (Sec. 178), Stakeholders Relationship Committee, CSR Committee (Sec. 135).
• Meetings: first AGM within 9 months of the first financial year end, later AGMs within 6 months of year end and within 15 months of the previous AGM (ROC may extend by 3 months); 21 clear days' notice; quorum 5/15/30 members for public companies by size, 2 for private. EGM by Board, requisition (members holding 10% paid-up voting capital) or NCLT. Board meetings (Sec. 173): at least 4 a year with a gap of not more than 120 days; quorum one-third or 2 directors, whichever is higher.
• Resolutions: ordinary (simple majority), special (not less than three-fourths — alteration of MoA/AoA, buy-back, reduction, voluntary winding up), resolutions requiring special notice; postal ballot and e-voting for prescribed companies.
• Accounts and audit: books at the registered office (Sec. 128) on accrual, double-entry, preserved 8 years; financial statements per Schedule III and applicable Ind AS/AS (Sec. 129); Board's Report (Sec. 134) with directors' responsibility statement; depreciation by useful life under Schedule II; auditor appointed for 5 years at the AGM (Sec. 139) with rotation for listed/prescribed companies, prohibited non-audit services (Sec. 144), audit report under Sec. 143 including fraud reporting.
• Filings: AOC-4 (financial statements) within 30 days of AGM; MGT-7/7A (annual return) within 60 days of AGM; ADT-1 (auditor); DIR-3 KYC; DPT-3; MSME-1. Late filing of the annual forms attracts additional fees of ₹100 per day per form.
• CSR (Sec. 135): applies if, in the immediately preceding financial year, net worth is ₹500 crore or more, or turnover ₹1,000 crore or more, or net profit ₹5 crore or more — spend at least 2% of the average net profit of the preceding three financial years (computed under Sec. 198); unspent earmarked amounts go to an Unspent CSR Account (3 years) and otherwise to a Schedule VII fund within 6 months.
• Dissolution: strike-off (Sec. 248), voluntary liquidation and insolvency resolution now largely under the IBC, 2016 before the NCLT; winding up by the Tribunal (Sec. 271) for just and equitable grounds, fraudulent conduct, default in filings. Oppression and mismanagement relief under Secs. 241–242; class action (Sec. 245); compromise, arrangement and amalgamation (Secs. 230–232), fast-track merger (Sec. 233).

Key points

• Companies Act, 2013 - 470 sections, 7 schedules, administered by MCA/ROC, adjudication by NCLT and NCLAT.
• Separate legal entity - the company owns property and sues in its own name; *Salomon v. Salomon* is the leading authority.
• Private company - 2 to 200 members, restricted transfer; public company - minimum 7 members, free transfer.
• OPC - one member plus a nominee; cannot be a Section 8 company or carry on NBFC investment activity.
• Small company - lower paid-up capital/turnover thresholds (currently ₹4 crore and ₹40 crore) with reduced compliance.
• MoA - six clauses (name, office, objects, liability, capital, subscription); defines external powers; AoA governs internal management.
• Ultra vires acts are void and cannot be ratified; indoor management protects a bona fide outsider.
• Certificate of incorporation is conclusive evidence of valid registration; INC-20A is needed before business starts.
• Prospectus - any public invitation for securities; misstatement brings liability under Secs. 34, 35 and 447.
• Shares at a discount are prohibited (Sec. 53) except sweat equity; bonus shares cannot come from revaluation reserve.
• Dividend only from profits after depreciation; pay within 30 days; unclaimed amounts move to IEPF after 7 years.
• Directors - 3/2/1 minimum for public/private/OPC, maximum 15; at least one resident director; DIN mandatory.
• Special resolution - three-fourths majority, needed for MoA/AoA alteration, buy-back, capital reduction, Sec. 180 powers.
• AGM - first within 9 months of first year end, then within 6 months of year end and 15 months of the last AGM.
• Board meetings - minimum 4 a year, gap not exceeding 120 days.
• Auditor - appointed for 5 years under Sec. 139; rotation and Sec. 144 restrictions for listed/prescribed companies.
• CSR - 2% of average net profit of 3 preceding years once a ₹500 cr / ₹1,000 cr / ₹5 cr trigger is met.
• Key filings - AOC-4 in 30 days and MGT-7 in 60 days of the AGM; ₹100 per day additional fee for delay.

Formulas and examples

Example 1 - CSR applicability and amount. A company has turnover ₹1,200 crore, net worth ₹300 crore and net profits of ₹6 crore, ₹9 crore and ₹12 crore in FY 2022-23, 2023-24 and 2024-25.

• Trigger: turnover ₹1,200 crore ≥ ₹1,000 crore → Sec. 135 applies for FY 2025-26 (any one limit suffices).
• Average net profit = (6 + 9 + 12)/3 = ₹9 crore.
• CSR spend = 2% × 9 = ₹0.18 crore = ₹18 lakh. If only ₹11 lakh is spent on an ongoing project, the unspent ₹7 lakh goes to an Unspent CSR Account within 30 days of year end and must be used within 3 years.

Example 2 - Buy-back limits. Paid-up equity capital ₹50 lakh, free reserves ₹150 lakh, existing total debt ₹300 lakh.

• Shareholder-approved fund ceiling = 25% × (50 + 150) = ₹50 lakh; separately, equity bought back in the year cannot exceed 25% × 50 = ₹12.5 lakh of paid-up equity capital (face value).
• Board-only (10%) route = 10% × 200 = ₹20 lakh.
• If ₹50 lakh is paid out, owned funds fall to ₹150 lakh, so permitted debt = 2 × 150 = ₹300 lakh. Existing debt is exactly ₹300 lakh → the 2:1 test is just met; any further borrowing would breach it.

Example 3 - Special resolution count. 10,000 equity shares, one vote each. At an EGM, holders of 6,000 shares attend; 4,700 vote in favour, 1,200 against, 100 abstain.

• Votes cast = 4,700 + 1,200 = 5,900. Share in favour = 4,700/5,900 = 79.66% ≥ 75% → special resolution passed (abstentions are not votes cast). Had 4,300 voted in favour and 1,600 against, the figure would be 4,300/5,900 = 72.9% → only an ordinary resolution would pass.

Example 4 - Late filing fee. AGM held 25 September 2025. AOC-4 due within 30 days = 25 October 2025; filed 10 December 2025.

• Delay = 6 days (October) + 30 (November) + 10 (December) = 46 days → additional fee = 46 × ₹100 = ₹4,600 over the normal fee. MGT-7 due 24 November 2025 (60 days).

Where it is used

• Statutory audit and assurance (Deloitte, PwC, EY, KPMG, Indian firms): Sec. 143 reporting, CARO 2020, Schedule III presentation, Sec. 185/186/188 compliance checks.
• Company secretarial and compliance teams in listed firms (Infosys, Reliance, TCS): board/AGM processes, MGT-7, AOC-4, LODR disclosures, secretarial audit (Sec. 204, MR-3).
• Banking and NBFC credit appraisal: verifying CIN, MoA objects, borrowing powers under Sec. 180, charges registered under Sec. 77 before sanctioning loans.
• Start-ups and MSMEs: choosing between OPC, private limited and LLP; SPICe+ incorporation; ESOP schemes; private placement for angel rounds.
• CSR and sustainability roles: computing and reporting the 2% spend, Annual Report on CSR, BRSR for large listed companies.
• Litigation and insolvency practice: NCLT matters on oppression, mergers, strike-off restoration and IBC resolution.

Interview questions

• Q: What is the single most important consequence of incorporation? A: Separate legal personality — the company is a person distinct from its members, so it owns assets, contracts and litigates in its own name, and members' liability is limited (*Salomon v. Salomon*).
• Q: When will a court lift the corporate veil? A: Where the company form is used for fraud, to evade law, tax or a contractual obligation, where it is a mere sham or agent, or where the statute itself fixes liability on officers in default.
• Q: Difference between MoA and AoA? A: The MoA is the charter stating the company's objects and powers towards outsiders; the AoA contains internal management rules and is subordinate — an article conflicting with the memorandum is void.
• Q: Can an ultra vires act be ratified by all shareholders? A: No. An act beyond the objects clause is void from the start and no shareholder majority, even unanimous, can validate it, though the memorandum can be altered prospectively.
• Q: Explain the doctrine of indoor management with an exception. A: An outsider dealing in good faith may assume internal procedures were followed (Turquand rule); it fails where the outsider knew of the irregularity, where circumstances were suspicious, or where the document was forged.
• Q: What are the maximum and minimum members and directors of a private company? A: Members 2 to 200 (joint holders counted as one, employee-members excluded); directors minimum 2, maximum 15 unless raised by special resolution.
• Q: Out of what can a company pay dividend? A: Out of current-year profits after providing depreciation, out of accumulated past profits transferred to reserves, or out of money provided by Government for that purpose — never out of capital or revaluation surplus.
• Q: When does Sec. 135 CSR apply and how much must be spent? A: If in the preceding financial year net worth is ₹500 crore or more, or turnover ₹1,000 crore or more, or net profit ₹5 crore or more; spend at least 2% of the average net profit of the three preceding financial years.
• Q: How is a statutory auditor appointed and for how long? A: By the members at the AGM under Sec. 139 for a term of five years (first auditor by the Board within 30 days of incorporation), with mandatory rotation for listed and prescribed companies.
• Q: What is a special resolution and give three matters requiring it? A: A resolution passed by at least three-fourths of votes cast after proper notice — needed for altering the MoA or AoA, buy-back of shares, and exercising Sec. 180 powers such as selling an undertaking.
• Q: Difference between a subsidiary and an associate company? A: A subsidiary is controlled — more than half the voting power or control of Board composition; an associate is only significantly influenced, generally 20% or more of voting power, including a joint venture.
• Q: Which forum handles company disputes and winding up today? A: The NCLT (appeals to NCLAT, then the Supreme Court), with insolvency and most liquidation now driven by the Insolvency and Bankruptcy Code, 2016.

Common mistakes

• Quoting 1956 Act sections or terms (statement in lieu of prospectus, Company Law Board) that the 2013 Act removed, or the minimum paid-up capital of ₹1 lakh/₹5 lakh, which the Companies (Amendment) Act, 2015 dropped.
• Confusing ultra vires (beyond the memorandum — void) with indoor management (procedural irregularity — outsider protected).
• Treating CSR as 2% of the latest year's profit instead of the average of three preceding years, or thinking all three triggers must be met.
• Mixing up resolution thresholds — using an ordinary resolution for MoA alteration or buy-back, or counting abstentions as votes against.
• Saying share capital limits liability of the company; limited liability protects the members, not the company, which is liable to its full assets.
• Confusing AGM timelines — forgetting the first AGM's 9-month rule or the 15-month gap, and quoting calendar-year instead of financial-year tests.
• Stating threshold figures (small company limits, CSR limits, deposit and dematerialisation rules) as permanent — several are set by rules and amended from time to time, so the current notification should be checked.

Related topics

Indian Contract Act basics · Auditing basics · Insolvency and Bankruptcy Code basics · Internal control and internal audit · Corporate accounting: shares and debentures · SEBI regulations and corporate governance