Section 2: Companies Act- Incorporating companies and compliances in India
Updated: Feb 25
Section 2 of the Companies Act contains various definitions of terms used in the Act. These definitions are important as they provide clarity on the meaning of terms used in the Act and ensure that the Act is applied uniformly. Here are some relevant case laws and rules related to Section 2:
Definition of "Company": Section 2(20) of the Companies Act defines a company as a company incorporated under the Act or any previous company law. In the case of LIC of India v. Escorts Ltd., the Supreme Court of India held that the word "incorporated" in the definition of a company is significant as it denotes a legal entity separate from its members.
Definition of "Director": Section 2(34) of the Companies Act defines a director as a person appointed to the board of a company. In the case of Bengal Emta Coal Mines Ltd. v. West Bengal Power Development Corporation Ltd., the Calcutta High Court held that a person who is not formally appointed as a director but exercises de facto control over the company may also be considered a director.
Definition of "Public Company": Section 2(71) of the Companies Act defines a public company as a company which is not a private company. Rule 3(1)(c) of the Companies (Incorporation) Rules, 2014, provides that a public company must have at least seven members. In the case of In Re: Satyam Computer Services Ltd., the Securities Appellate Tribunal held that a public company must also comply with various disclosure requirements and regulations related to the sale of securities.
Definition of "Related Party": Section 2(76) of the Companies Act defines a related party as a person who is related to the company in a specific way, such as a director or a person in a position to influence the company's decision-making. In the case of In Re: Ricoh India Ltd., the Securities and Exchange Board of India held that related party transactions must be disclosed to shareholders and must be conducted at arm's length to ensure fairness.
Definition of "Independent Director": Section 149(6) of the Companies Act defines an independent director as a director who does not have any material or pecuniary relationship with the company, its promoters, or its directors. Rule 4(1)(i) of the Companies (Appointment and Qualification of Directors) Rules, 2014, provides additional criteria for determining independence. In the case of SEBI v. Price Waterhouse, the Securities and Exchange Board of India held that independent directors must act in the best interests of the company and its stakeholders and must exercise their own independent judgment.
Definition of "Manager": Section 2(53) of the Companies Act defines a manager as a person who has control over the affairs of the company, but is not a director or a key managerial personnel. In the case of Hindustan Unilever Ltd. v. SEBI, the Securities Appellate Tribunal held that a person who is not formally designated as a manager but exercises de facto control over the company may also be considered a manager.
Definition of "Key Managerial Personnel": Section 2(51) of the Companies Act defines key managerial personnel as the chief executive officer, managing director, whole-time director, company secretary, and chief financial officer. Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, provides additional criteria for determining who is considered key managerial personnel. In the case of United Bank of India v. Satyawati Tondon, the Supreme Court held that key managerial personnel are responsible for ensuring compliance with various legal and regulatory requirements.
Definition of "Officer in Default": Section 2(60) of the Companies Act defines an officer in default as any director or key managerial personnel who is in default or has been negligent in performing his/her duties. In the case of In Re: Bhushan Steel Ltd., the National Company Law Appellate Tribunal held that an officer in default may also include a person who is not formally appointed as a director but exercises control over the company's affairs.
Definition of "Subsidiary Company": Section 2(87) of the Companies Act defines a subsidiary company as a company in which the holding company controls the composition of the board of directors or holds more than half of the total share capital. In the case of Tata Consultancy Services Ltd. v. State of Andhra Pradesh, the Supreme Court held that a subsidiary company is a separate legal entity from its holding company, and the holding company is not liable for the subsidiary's debts and liabilities unless it has given a guarantee.
Definition of "Small Company": Section 2(85) of the Companies Act defines a small company as a company which has a lower turnover and paid-up capital than the thresholds specified in the Act. Rule 2A of the Companies (Specification of Definitions Details) Rules, 2014, provides additional criteria for determining whether a company is a small company. In the case of In Re: Lanco Industries Ltd., the National Company Law Tribunal held that small companies are exempt from various regulatory requirements and may have simplified procedures for compliance.
Definition of "One Person Company": Section 2(62) of the Companies Act defines a One Person Company (OPC) as a company which has only one person as its member. In the case of P.R. Ramakrishnan v. Registrar of Companies, the Madras High Court held that an OPC is a separate legal entity from its sole member, and the member is not liable for the company's debts and liabilities unless he/she has given a guarantee.
Definition of "Turnover": Section 2(91) of the Companies Act defines turnover as the gross amount of revenue generated by a company from its business activities. Rule 6 of the Companies (Accounts) Rules, 2014, provides additional guidance on how to calculate turnover. In the case of IndusInd Bank Ltd. v. Securities and Exchange Board of India, the Securities Appellate Tribunal held that turnover is a key factor in determining whether a company is required to comply with various regulatory requirements.
Definition of "Paid-up Capital": Section 2(64) of the Companies Act defines paid-up capital as the amount of capital that has been paid by the shareholders to the company in exchange for shares. Rule 2(c) of the Companies (Specification of Definitions Details) Rules, 2014, provides additional guidance on how to calculate paid-up capital. In the case of In Re: Amtek Auto Ltd., the National Company Law Tribunal held that paid-up capital is important in determining the financial health and viability of a company.
Definition of "Shareholder": Section 2(84) of the Companies Act defines a shareholder as a person who owns shares in a company. In the case of Ramesh Kumar Agarwal v. SEBI, the Securities Appellate Tribunal held that shareholders have certain rights, including the right to vote on important matters and the right to receive dividends.
In summary, Section 2 of the Companies Act provides definitions for various important terms used in the Act. Understanding these definitions and their implications is crucial for ensuring compliance with the Act and avoiding legal liabilities. It is important to be aware of the relevant case laws and rules related to Section 2 to ensure that the definitions are applied correctly.
By Siddharth Dalmia
The StartUp Sherpa
+91-9971799250
dalmiasiddharth1994@gmail.com
