: January 25, 2013 |
: Company Law
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The word ‘Company’ has no strictly technical and legal meaning. The word company is derived from the Latin word ‘Com’ meaning with or together and ‘panis’ means bread. It originally referred to an association of persons who took their meals together. In the leisurely past, merchants took advantage of festive gatherings, to discuss business matters. Nowadays, the business matters have become more complicated and cannot be discussed at length at the festive gatherings. Therefore, the word company assumed the greater importance. It denotes a joint stock enterprise in which the capital is contributed by a large number of people. Thus, in popular parlance, a company denotes an association of likeminded persons formed for the purpose of carrying on some business or undertaking. A company is a corporate body and a legal person having status and personality distinct and separate from that of the person constituting it.
The word ‘company’ in simple terms, may be described to mean a voluntary association of persons who have come together for carrying on some business and sharing the profits there from.
The Companies Act, 1956 does not define a company in terms of its features. Section 3(1)(i) of the Act merely states that “ a company means a company formed and registered under this Act or an existing company as defined in section 3(1)(ii).” Section states that “an existing company means a company formed and registered under any previous Company Law.” In common law, a company is a “legal person” or “legal entity” separate from, and capable of surviving beyond the lives of its members.
But a company is not merely a legal institution. It is rather a legal device for the attainment of any social and economic end. It is, therefore, a combined political, social, economic and legal institution. Thus, the tem company has been described in the many ways. “It is a means of cooperation and organization in the conduct of an enterprise.” It is “an intricate, centralized, economic and administrative structure run by professional managers who hire capital from investor(s).”
The Companies Act, 1956 provides for a variety of companies that may be promoted and registered under the Act. The two common types of companies which may be registered under the Act are-:
(a) Private companies
(b) Public companies
These companies may be incorporated either as limited liability companies or as unlimited liability companies. Limited liability companies may be-:
(i) Companies limited by shares; (ii) Companies limited by guarantee; (iii) Companies limited by guarantee as well as shares.
Companies may also be classified as-:
(a) Statutory Companies; (b) Registered Companies; (c) Existing Companies; (d) Association Not for Profit; (e) Government Companies; (f) Foreign Companies; (g) Holding and Subsidiary Companies; (h) Investment Companies.
A public enterprise incorporated under the Indian Companies Act, 1956 is called a government company. These companies are owned and managed by the central or the state government. Section 617 of the Companies Act, 1956 defines “Government Companies” as any company in which not less than 51% of the [paid-up share capital] is held by-:
1. The Central Government; or
2. Any State Government or governments; or
3. Partly by the Central Government and partly by one or more State Governments.
A subsidiary of a Government company shall also be treated as a Government company. These companies are registered as private limited companies though their management and their control vest with the government. This is a type of organization where both the government and private individuals are shareholders. Sometimes these companies are called as a mixed ownership company.
As per the definition of Section 617 a Government company denotes ‘any company’ and the term ‘company’ in the Companies Act, 1956 means a company as defined in the Section 3 of the Act, according to which a company is the one formed and registered under the Companies Act, 1956 and any company existing prior thereto.
Government Company Different From Statutory Company
Since the concept of the Government Company was introduced by the Act of 1956, a Government Company shall invariably mean a company registered and incorporated under Companies Act, 1956 only. Statutory Corporation formed under a statute of the Legislature, like Life Insurance Corporation is not a ‘company’ under the Companies Act, 1956 and as such is not a Government Company. These are corporations as distinguished from Government companies and are incorporated under separate Acts of the Parliament.
Bodies with special types of objects which it has been thought desirable to encourage may be formed under general public Acts such as the Friendly Societies, the Industrial and Provident Societies and the Building Societies Acts in the United Kingdom. In our country also similar legislations exist like the Unit Trust of India Act, Life Insurance Corporation Act, Reserve Bank of India Act, etc. They all are examples of statutory corporations. Body or bodies covered by these Acts do not necessarily require having a memorandum of association. Each statutory company is governed by the provisions of its special Act. However, the provisions of the Companies Act, 1956 applies to them, insofar as the same are not inconsistent with the special Acts under which these companies are formed.
The following are the features of the Government Company-:
1. Incorporation -: The Government Company is registered under Companies Act, 1956. The provisions of Indian companies Act, 1956 are applicable in respect of conduct of meetings, rising of capital, appointment of directors, auditors, etc. It enjoys the status of a legal entity and therefore it can use or be sued by others.
2. Annual Accounts-: The annual accounts of a Government Company are placed before the parliament or state government for review.
3. Management-: It is managed by a Board of Directors, most of who are appointed by the government.
4. Exemption from Companies Act-: The Government reserves the right exempt such a company from certain provisions of the Indian Companies Act.
5. Objective –: It operates on commercial principles, and as such it aim is to make profit apart from other objectives.
6. Need for Privatization -: There is growing move to privatize a good number of government Companies so as to improve their efficiency.
7. Capital Contribution -: Its Capital is contributed by Central/State Governments and public. 51% or more of its paid up capital is contributed by the government. The public hold minority shareholding in Government Companies.
8. Staff -: This type of organization can recruit its own employees and they are not government servants. Their terms of service are not governed by the civil service rules. However, the employees of departmental undertakings are Government servants, and are governed by Civil Service Rules.
Legal Status Of The Government Company
There has been a catena of cases right from the Soloman v. Soloman & Co. Ltd., which has established that a company brought into existence under the Companies Act has a separate existence and a law recognizes a company as a juristic person separate and distinct from its members. This personification emerges from the moment of its incorporation, and from that date, the person subscribing to its memorandum of association and others joining it as members are regarded as a body incorporated or a corporate aggregate and the new person begins to function as an entity. The rights and obligations of a company are distinct from those of its shareholders. Therefore, the legal status of a Government company is not affected just because the share capital of the company is contributed by the Central Government and all its shares are held by the President of India or the Governor of the State and certain nominated officers of the Government. The observations reproduced of Justice P.L. Mukherjee In Re River Steam Navigation Co. Ltd., brings out clearly the legal position of the Government Company:
“Government today is a competitor with public/private companies and corporations, and doing trade or business or commerce. In doing so the Government is doing it qua Government. It joins the field of competition in these diverse spheres and fields as Government Companies, as State trading corporations and in many other forms under particular statutes.”
The consensus seems to be that when the government engages itself in trading ventures, particularly as Government companies under the company law, it does not do so as a political State or political Government, but it does so in the grab and essence as a company. A Government is not a department of Government. In Andhra Pradesh State Road Transport Corporation v. ITO, the Andhra Pradesh Road Transport Corporation claimed exemption from taxation invoking Article 289 of the Constitution of India according to which the property and income of the state are exempted from the Union taxation. The Supreme Court, while rejecting the Corporation’s claim, held that though it was wholly controlled by the State Government, it had a separate entity and its income was not the income of the State Government. Similarly, in Western Coalfields Limited v. Special Area Development Authority, the Supreme Court did not uphold the contention of the Western Coalfields Ltd. and Bharat Aluminum Company Ltd. (the petitioners) that they were wholly owned by the Government of India and so the companies could not be subjected to property tax. The Chief Justice of India, Shri Chandrachud, observed as follows:
“Even though the entire share capital of the appellant companies has been subscribed by the Government of India, it cannot be predicted that the companies themselves are owned by the Government of India. The Companies which are incorporated under the Companies Act, have a corporate personality of their own, distinct from that of the Government of India. The land and buildings are vested in and owned by the companies, the Government of India only owns the share capital.”
On the rationale of the aforesaid judgments, in Hindustan Steel Works Construction Co. Ltd. v. State of Kerala, it was held that notwithstanding all the pervasive control of the Government, company is neither a Government department nor a Government establishment. It is just an instrumentality or agency of the Government, and hence not exempt from the preview of the Kerala Construction Workers Welfare Fund Act. However, where more than 97% of the share capital of the company has been contributed by the State Government and the financial institutions controlled and belonging to the Government of India on the security and undertaking of the State Government, that the memorandum of association entrusted the company with important public duties, that out of 12 directors 5 were Government and departmental persons, besides other elected directors also were to be with the concurrence and the nomination of the Government, it was clear that the State Government had deep and pervasive control of the company and its day-to-day administration, and the company was nothing but an instrumentality and agency of the State Government and the physical form of the company was merely a cloak or cover for the Government.
A Government company can even sue the Government in its own name as a litigant. But, since protracted litigation between a Government company on the one hand and a government department on the other, results in waste if public money and other resources including time, such disputes are resolved, as far as possible, outside the juridical process.
The employees of the Government Company are not the employees of the Central or the State Government. Since employees of Government companies are not Government servants they have no legal right to claim that the Government should pay their salary or that the additional expenditure incurred on account of revision of their pay scales should be met by the Government. Since, employees of Government companies are not Government servants; they have no legal right to claim that the Government should pay their salary or that the additional expenditure incurred on account of revision of their pay scales should be met by the Government. It is the responsibility of the company to pay them the salaries.
Government Company Is State Itself
If the Government Company is an authority, it shall be equivalent to a State and then it must also accept the obligations of the State.
The Supreme Court in Ajay Hasia v. Khalid Majit, that a Government company may symbolize State. Justice Bhagwati observed as follows:
“It is immaterial for the purpose whether the corporation is created by the statute or under a statute. The test is whether it is an instrumentality or agency of the Government and not as to how it created. The inquiry has to be not as to how juristic person is born but why it has been brought into existence. The corporation may be a statutory corporation created by statute or it may be a Government company formed under the Companies Act, 1956, or it may be the society registered under Societies Registration Act, 1860 or any other similar statute. Whatever be its genetic origin, it would be an authority within the meaning of Article 12 if it is an instrumentality or agency of the Government and that would have to be decided on a proper assessment of the facts in the light of the relevant factors. The concept of instrumentality or agency of the Government is not limited to a corporation created by the statute but is equally applicable to a company or society and in a given case it would have to be decided on a consideration of the relevant factors whether the company or society is an instrumentality or agency of the Government so as to come within the meaning of the expression ‘authority’ in Article 12.”
Where more than 97% of the share capital of the company has been contributed by the State Government and the financial institutions, controlled and belonging to the Government of India on the security and undertaking of the State Government, that the memorandum of association entrusted the company with important public duties, that out of 12 directors 5 were Government and departmental persons, beside other elected directors also were to be with the concurrence and nomination of the Government, it was clear that the State Government had deep and pervasive control of the company and its day to day administration, and the company was nothing but an instrumentality and agency of the State Government, and the physical form of the company was merely a cloak or cover for the Government.
Question whether an entity is a State within the meaning of Article 12 has to be decided by taking into consideration the cumulative facts as established and that whether such body or entity is financially, functionally and administratively dominated by or under the control of the Government.
The question arises that how should it be determined as to whether a Government Company is an instrumentality or an agency of the Government or not? Justice Bhagwati felt that it was not possible to evolve a straight formula by which corporations could be classified into those which are instrumentalities of Government and those which are not. An attempt to lay down tests in regard was made in Ramana Dayaram Shetty v. International Airports Authority of India, are as follows:
· If the entire share capital of the corporation is held by Government, it would go a long way towards indicating that the corporation is an instrumentality or agency of Government;
· Existence of deep and pervasive State control may afford an indication that the corporation is a State agency or instrumentality;
· It may also be a relevant factor whether the corporation enjoys monopoly status which is State conferred or State protected;
· If the functions of the corporations are of public importance and closely related to Government functions, it would be a relevant factor in classifying the corporation as an instrumentality or agency of Government.
· Specifically if a department of Government is transferred to a corporation it would be a strong factor supporting this inference of the corporation being an instrumentality or agency of the government.
A Government Company- Whether A Private Or Public Company
The question whether the Government company to be incorporated as private company or public company, is a question on which Companies Act, 1956 is silent. As a result, a Government company may be incorporated either way. In fact, incorporating Government Company as a private company is more convenient since only two members are needed to constitute it. Consequently, originally almost all Government companies were established as private limited companies and the articles of association of such companies included matters contained in clause (iii) of sub-section (1) of Section 3 of the Companies Act, 1956.
Audit Of Government Companies
Section 619 of the Act, as amended by the Companies (Amendment) Act, 2000 provides that the auditor of a Government Company shall be appointed or reappointed but the Controller and Auditor General of India (C. & A.G.).
The Controller and Auditor General of India have the power to direct the manner in which the accounts are to be audited and to give instructions to the auditor in regard to any matter relating to the performance of his function. The C. & A.G. may also conduct a supplementary test audit by persons authorized by him. The auditor of company must submit a copy of his audit report to the C. & A.G., who may comment upon, or supplement, the audit report. Such comments or supplementary report must be placed before the annual general meeting of the company at the same time and in the same manner as the auditor’s report.
In case of Government Companies, the Central Government must place before both the Houses of Parliament an annual report on the working and affairs of each Government Company within three months of its annual general meeting together with a copy of the audit report and any comments upon or supplement to such report made by the C. & A.G. of India. Where a State Government is a member of Government Company, the annual report is likewise to be placed before the State Legislature (Section 619A).
Section 619B provides that the provisions of Section 619 shall apply to two other classes of companies which are treated as Government companies for the purpose of audit. Accordingly, the appointment of auditors of such companies can be made by C. & A.G. in which not less than 51% of the paid-up capital is held jointly by the Government and Government Company or companies. Only the provisions relating to audit, applying to Government companies will apply to these companies. In respect of all other matters these companies are in the same position and are governed by the provisions of the Act in the same manner as other companies.
Special Provisions Applicable To A Government Company-:
The Central Government may, by notification in the Official Gazette, direct that any of the provisions of the Act [other than sections 618, 619 and 619 A] as may be specified therein shall not apply to any Government company, or shall apply with such exemptions, modifications and adoptions as may be specified in the notification [Section 620].
In exercise of its powers under section 620, the Central Government has issued notifications modifying the operations of different provisions of the Companies Act to Government companies as under-:
1. Memorandum- Name Clause: Section 13 of the Companies Act, 1956 requires that the words ‘private limited’ shall be added to the name of the private limited company. A Government company is exempted from having the word ‘private’ as part of its name. So when a company becomes a Government company by virtue of shareholding by the Government, the board of directors of Government Company may decide to have the word ‘private’ omitted from its name. The approval of special resolution is not necessary where the alteration of the name clause consists only in the deletion of the word ‘private’ there from.
2. Annual General Meeting- Extension of time: In terms of section 166(1) of the Companies Act, 1956, the Registrar of Companies may for a very special reason grant extension of time for holding the annual general meeting (other than the first) by a period not exceeding three months. In case of a Government company, however, the approval of the Central Government instead of Registrar of Companies is obtained from such extension of time.
3. Venue of Meeting: Every annual general meeting of a company must be held at the registered office of the company or at some other place within the city, town or village in which the registered office is situated. The annual general meeting of a government company may, however, be held at such other place as the Central Government may approve instead of being in the same place with the city, town or village in which the registered office of a company is situated.
4. Approval of the Court: The Government Company shall approach the Central Government for consent/approval where ever the Companies Act, 1956 provides that the consent of the Court is to be obtained.
5. Cognizance of Offences: Sub-section (1) of section 621 shall be applicable to Government company with the omission of the words ‘the Registrar or by a shareholder of a company’. So no court can take cognizance of any offence under Companies Act, 1956 committed by a Government company or any of its officers in default unless a complaint is made by a person authorized by Central Government to do so. Thus, the discretionary power is vested with the Central Government is lodge a complaint with a court of law against a Government company.
6. Exemptions: The Central Government, by notification issued time to time, has exempted the applicability of certain other provisions of the Companies Act, 1956 in respect of Government companies.
The advantages of Government companies are as follows-:
1. Easy Formation: Government Company is formed and registered under the Indian Companies Act, 1956, either as a Private company or as a Public company. It does not require any Special Act for its formation.
2. Huge Capital: A government company requires huge capital for its business operations. The company is free to collect capital through its own sources & it can even borrow the money depending upon its requirement.
3. Management: Management of Government Company is vested in the hands of Board of Directors. The directors may be nominated by government or even the shareholders can appoint the Board of Directors. The Directors are free to take any decision as regards to company's policies.
4. Professional Management: The government company due to huge capital & large size of organization can easily afford to appoint professionals resulting in increased efficiency of the company.
5. Flexibility: A government enjoys full flexibility in its operations. It is free to adopt different changing policies according to changing business environment.
6. Sectional Development: The government company helps in development of backward areas & weaker sections which are usually neglected by private sector.
7. Separate Legal Status: A government company, like a joint stock company is an incorporated association & artificial person having a common seal & perpetual succession. It has a separate legal entity from its owners.
8. Exemptions: A government company is exempted from Budgetary Accounting & Audit. But, its auditors are appointed by the government as per the guidance of controller and Auditor General of India. Also it may get concession in taxes & other duties which other organizations may not get.
Disadvantages of Government Companies are-:
1. Government companies are autonomy in theory, but in practice it is not autonomy because political people interfere in the day-to-day operation of the companies. Since these are dependent on the government for taking important policy decisions, red-tapism in government departments affect the working of companies.
2. As most of the government companies take the assistance of civil servants, they cannot exercise better for the effectiveness of the organization because they are not technical persons.
3. Most of the government companies experience slackness in management under the grab of public services. These are not treated as efficient as private units because of this state of affairs found.
A public enterprise incorporated under the Indian Companies Act, 1956 is called a government company. These companies are owned and managed by the central or the state government. These companies are registered as private limited companies though their management and their control vest with the government. This is a type of organization where both the government and private individuals are shareholders. Sometimes these companies are called as a mixed ownership company.
# Stanley, Re 1 Ch. 131.
# Substituted by Act No. 65 of 1960, for the words "share capital"
# Insertetd by Act No. 65 of 1960
# Bishnoi Baldev, Meaning, Defination and Features of Government Company,
# Section 616
# Bishnoi Baldev, Meaning, Defination and Features of Government Company,
# [1895-99] All. ER 33(HL)
# Heavy Engineering Mazdoor Union v. State of Bihar  39 Comp. Cas. 905(SC)
# 2 Comp. LJ 106
# AIR 1964 SC 1468
# AIR 1982 SC 696
# 2 CLJ 383
# Mysore Paper Mills Ltd. v. Mysore Paper Mills Officers Association, 37 SCL 742(SC)
# A.K. Bindal v. Union of India, (2003) 114 Comp.Cas. 590 (SC)
# AIR 1981 SC 496
# Mysore Paper Mills Ltd. v. Mysore Paper Mills Officers Association, 37 SCL 742(SC)
# R.V. Dnyansagar v. Maharashtra Industrial and Technical Consultancy organisation Ltd.,  46 SCL 153(Bom.)
# AIR 1979 SC 1628
# Section 12(1) of the Companies Act, 1956.
# Vide Notification No. GSR 1649 dated November 13, 1965.
# Amended by Notiication No. GSR 1473 dated December 16, 1961.
# Section 166(2).
# Amended by Notification No. GSR 1473 dated December 16, 1961.
# Vide Notification No. GSR 238 dated February 2, 1978.
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