[FAQs] Companies Act 2013 Provisions – Formation | Liabilities | Regulations for Companies

Members severally liable in certain cases:

As per Sec. 3A of the Companies Act, 2013, if at any time the number of members of a company is reduced, in the case of a public company, below 7, in the case of a private company, below 2, and the company carries on business for more than 6 months while the number of members is so reduced, every person who is a member of the company during the time that it so carries on business after those 6 months and is cognisant of the fact that it is carrying on business with less than 7 members or 2 members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefor.

Sec. 8 of the Companies Act, 2013 deals with the formation of companies which are formed to promote the charitable objects of commerce, art, science, education, sports etc. Such company intends to apply its profit in promoting its objects.

Sec. 8 companies are registered by the Registrar only when a license is issued by the C.G. to them. Since, Alfa School was a Sec. 8 company and it had started violating the objects of its objective clause, hence in such a situation the following powers can be exercised by the C.G.:

• Revocation of license: The C.G. may by order revoke the licence of the company where the company contravenes any of the requirements or the conditions of this sections subject to which a licence is issued or where the affairs of the company are conducted fraudulently, or violative of the objects of the company or prejudicial to public interest, and on revocation the Registrar shall put ‘Limited’ or ‘Private Limited’ against the company’s name in the register.
  Before such revocation, the C.G. must give it a written notice of its intention to revoke the licence and opportunity to be heard in the matter.
• Order for Winding up or Amalgamation of the company: Where a licence is revoked, the C.G. may, by order, if it is satisfied that it is essential in the public interest, direct that the company be wound up under this Act or amalgamated with another company registered under this section.
  However, no such order shall be made unless the company is given a reasonable opportunity of being heard.
• Order for providing amalgamation to form a single company: Where a licence is revoked and the C.G. is satisfied that it is essential in the public interest that the company registered under this section should be amalgamated with another company registered under this section and having similar objects, then, notwithstanding anything to the contrary contained in this Act, the Central Government may, by order, provide for such amalgamation to form a single company with such constitution, properties, powers, rights, interest, authorities and privileges and with such liabilities, duties and obligations as may be specified in the order.

• As per Sec. 8 of the Companies Act, 2013, the C.G. may by order revoke the licence of the company where the company contravenes any of the requirements or the conditions of this section subject to which a licence is issued or where the affairs of the company are conducted fraudulently, or violative of the objects of the company or prejudicial to public interest.
• Where a licence is revoked, the C.G. may, by order, if it is satisfied that it is essential in the public interest, direct that the company be wound up under this Act or amalgamated with another company registered under this section.
• Where a licence is revoked and where the C.G. is satisfied that it is essential in the public interest that the company registered under this section should be amalgamated with another company registered under this section and having similar objects, then, the C.G. may, by order, provide for such amalgamation to form a single company with such constitution, properties, powers, rights, interest, authorities and privileges and with such liabilities, duties and obligations as may be specified in the order.

As required by Sec. 8 of the Companies Act, 2013, the companies licenced u/s 8 of the Act (Formation of companies with Charitable Objects, etc.) are prohibited from paying any dividend to their members. Their profits are intended to be applied only in promoting the objects for which they are formed.

• As per Sec. 8(1) of the Companies Act, 2013, where it is proved to the satisfaction of the C.G. that a person or an association of persons proposed to be registered under this Act as a limited company

(a) has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object;

(b) intends to apply its profits, if any, or other income in promoting its objects; and

(c) intends to prohibit the payment of any dividend to its members;

the Central Government may, by issue of licence, allow that person or association of persons to be registered as a limited liability company.

• As per Sec. 8(9), if on the winding up or dissolution of a company registered under this section, there remains, after the satisfaction of its debts and liabilities, any asset, they may be transferred to another company registered under this section and having similar objects, subject to such conditions as the Tribunal may impose, or may be sold and proceeds thereof credited to Insolvency and Bankruptcy Fund formed u/s 224 of the IBC, 2016.
• In the given case, the decision of the group of individuals to form a limited liability company for charitable purpose u/s 8 for a period of 10 years and thereafter to dissolve the club and to distribute the surplus of assets over the liabilities, if any, amongst the members will not hold good, since there is a restriction as pointed out in point (b) above regarding application of its profits or other income only in promoting its objects.
• Further, there is restriction in the application of the surplus assets of such a company in the event of winding up or dissolution of the company as provided in Sec. 8 of the Companies Act, 2013.

• As per Rule 3 of Companies (Incorporation) Rules, 2014 as amended by Companies (Incorporation) 2nd Amendment Rules, 2021, only a natural person who is an Indian citizen whether resident in India or otherwise shall be eligible to incorporate a One Person Company (OPC) or be a nominee for the sole member of a One Person Company.
• Residential status of a person is now irrelevant in deciding whether an individual can incorporate an OPC or be a nominee for the sole member of an OPC.

• As per Sec. 3 of the Companies Act, 2013, the memorandum of OPC shall indicate the name of the other person (nominee), who shall, in the event of the subscriber’s death or his incapacity to contract, become a member of the company. Such other person (nominee) may withdraw his consent in the prescribed manner.
• As per Rule 3 of Companies (Incorporation) Rules, 2014 as amended by Companies (Incorporation) 2nd Amendment Rules, 2021, only a natural person who is an Indian citizen whether resident in India or otherwise shall be eligible to incorporate a One Person Company (OPC) or be a nominee for the sole member of a One Person Company.
• The term “Resident in India” means a person who has stayed in India for a period of not less than 120 days during the immediately preceding financial year.
• Residential status of a person is now irrelevant in deciding whether an individual can incorporate an OPC or be a nominee for the sole member of an OPC.
• A natural person shall not be member of more than a One Person Company at any point of time and the said person shall not be a nominee of more than one OPC.
• No minor shall become member or nominee of the OPC or can hold share with beneficial interest. Conclusion: Applying the provisions of Sec. 3, Mr. King can withdraw his consent as nominee of the One Person Company by giving a notice in writing to the sole member and to the OPC.

Revocation of License of Sec. 8 company:

• As per Sec. 8(6) of the Companies Act, 2013, the C.G. may by order revoke the licence of the company where the company contravenes any of the requirements or the conditions of this section subject to which a licence is issued or where the affairs of the company are conducted fraudulently, or violative of the objects of the company or prejudicial to public interest.
• On revocation, the Registrar shall put ‘Limited’ or ‘Private Limited’ against the company’s name in the register. But before such revocation, the C.G. must give the company a written notice of its intention to revoke the licence and opportunity to be heard in the matter.

Winding up of Sec. 8 company:

• Where a licence of Sec. 8 company is revoked, the C.G. may, by order, if it is satisfied that it is essential in the public interest, direct that the company be wound up under this Act or amalgamated with another company registered under this section.
• However, no such order shall be made unless the company is given a reasonable opportunity of being heard. [Sec. 8(7)]

Amalgamation of Sec. 8 company with another company:

A company registered under this section shall amalgamate only with another company registered under this section and having similar objects. [Sec. 8(10)]

Minimum number of persons required to form a company:

As per Sec. 3 of the Companies Act, 2013, a company may be formed for any lawful purpose by:

(a) 7 or more persons, where the company to be formed is to be a public company;

(b) 2 or more persons, where the company to be formed is to be a private company; or by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration.

Consequences when the number of members falls below the minimum prescribed limit:

As per Sec. 3A of the Companies Act, 2013, if at any time the number of members of a company is reduced, in the case of a public company, below 7, in the case of a private company, below 2, and the company carries on business for more than six months while the number of members is so reduced, then every person who is a member of the company during the time that it so carries on business after those six months and is cognizant of the fact that it is carrying on business with less than 7 members or 2 members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time and maybe severally sued therefore.

Persons eligible to act as a member of OPC:

• As per Rule 3 of the Companies (Incorporation) Rules, 2014, Only a natural person who is an Indian citizen whether resident in India or otherwise shall be eligible to incorporate a One Person Company (OPC) or be a nominee for the sole member of a One Person Company.
• The term “Resident in India” means a person who has stayed in India for a period of not less than 120 days during the immediately preceding financial year.
• A natural person shall not be member of more than a One Person Company at any point of time and the said person shall not be a nominee of more than one OPC.

Conversion of OPC into other company as on 01st Dec. 2024:

As per Rule 6 of the Companies (Incorporation) Rules, 2014, OPC may be converted into a Private or Public Company, other than a company registered u/s 8 of the Act, after increasing the minimum number of members and directors to 2 or 7 members and 2 or 3 directors, as the case may be, and maintaining the minimum paid-up capital as per the requirements of the Act for such class of company and by making due compliance of Sec. 18 of the Act for conversion.

Conversion of OPC into other company in Aug. 2023:

Rule 3 of the Companies (Incorporation) Rules, 2014 which provides that OPC cannot convert voluntarily into any kind of company unless 2 years have expired from the date of incorporation of OPC, except where the paid-up share capital is increased beyond 3 50 Lacs or its average annual turnover during the relevant period exceeds 3 2 Crore has been deleted by the Companies (Incorporation) 2nd Amendment Rules, 2023 w.e.f. 01.04.2023.
Hence, OPC can be converted into a Private or Public Company, other than a company registered u/s 8 of the Act, any time after complying with the provisions as stated in Rule 6.

As per Sec. 8 of the Companies Act, 2013, the Central Government (ROC in its behalf) may grant a licence (to operate as a non-profit organisation) if it is proved to the satisfaction that a person or an association of persons proposed to be registered under the Companies Act, 2013, as a LLP:

• has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object;
• intends to apply its profits (if any) or other income in promoting its objects; and
• intends to prohibit payment of any dividend to its members.

Powers of Tribunal in case a company is incorporated by furnishing any false information:

As per Sec. 7(7) of the Companies Act, 2013, where a company has been got incorporated by furnishing false or incorrect information, the Tribunal may, on an application made to it, on being satisfied that the situation so warrants—

1. pass such orders, as it may think fit, for regulation of the management of the company including changes, if any, in its memorandum and articles, in public interest or in the interest of the company and its members and creditors; or
2. direct that liability of the members shall be unlimited; or
3. direct removal of the name of the company from the register of companies; or
4. pass an order for the winding up of the company; or
5. pass such other orders as it may deem fit.

• However, before making any order:

1. the company shall be given a reasonable opportunity of being heard in the matter; and
2. the Tribunal shall take into consideration the transactions entered into by the company, including the obligations, if any, contracted or payment of any liability.

• Also the promoters, the persons named as the first directors of the company and the persons making declaration at the time of registration of company shall each be liable for action under section 447.

As per Sec. 10A of the Companies Act, 2013, a company incorporated after 02.11.2018 and having a share capital shall not commence any business or exercise any borrowing powers unless:

• A declaration is filed by a director within a period of 180 days of the date of incorporation of the company in such form and verified in such manner as may be prescribed, with the Registrar that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him on the date of making of such declaration; and
• The company has filed with the Registrar a verification of its registered office as provided in Sec. 12(2).

As per Sections 9 and 10 of the Companies Act, 2013 following shall be the effect of registration of a company:

1. From the date of incorporation, the subscribers to the memorandum and all members of the company, shall become a body corporate.
2. Such a registered company shall be capable of exercising all the functions of an incorporated company with the perpetual succession with power to acquire, hold and dispose of property, and to contract and to sue and be sued.
3. The memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member, and contained covenants on its and his part to observe all the provisions of the memorandum and of the articles.
4. All monies payable by any member to the company under the memorandum or articles shall be a debt due from him to the company.

1. Content: The memorandum contains the fundamental conditions as basis of incorporation. It lays down the parameters that define relation of company with outsiders. The Articles contain internal regulations of the company; hence regulate the relationship between company and the members and members inter se.
2. Supremacy: Memorandum cannot include any clause that is contrary to the provisions of the law, whereas the articles shall be subordinate to both the law and memorandum. Therefore, in case on conflict among the two, the MOA shall prevail.
3. Scope: Memorandum lays down the scope beyond which the activities of the company cannot go. An act done by a company beyond the scope of the memorandum are ultra vires and void. They cannot be ratified even by all the shareholders. Articles provide for regulations inside scope established by MOA, hence acts beyond the articles can be ratified by the shareholders provided the relevant provisions are not beyond the memorandum.

Sec. 5 of the Companies Act, 2013 deals with the provisions relating to entrenchment. Accordingly,

1. The article may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if more restrictive conditions than a special resolution, are met.
2. The provisions for entrenchment shall only be made either on formation of a company, or by an amendment in the articles agreed to by all the members of the company in the case of a private company and by a special resolution in the case of a public company.
3. Where the articles contain provisions for entrenchment, whether made on formation or by amendment, the company shall give notice to the Registrar of such provisions in prescribed manner.