Section 3: Companies Act- Incorporating companies and compliances in India
Updated: Feb 25
Section 3 of the Companies Act, 2013 deals with the formation of a company and its classification as a public or private company. It also sets out the requirements for incorporating a company.
Definition of "Company": Section 3(1)(i) of the Companies Act defines a company as a legal entity formed by a group of individuals for carrying on a business or trade. In the case of Salomon v. Salomon & Co. Ltd., the House of Lords held that a company is a separate legal entity from its shareholders and can enter into contracts and own property in its own name.
Definition of "Public Company": Section 3(1)(iv) of the Companies Act defines a public company as a company which is not a private company and has a minimum of seven members. In the case of M/s. Bharat Rasayan Ltd. v. Securities and Exchange Board of India, the Securities Appellate Tribunal held that public companies have certain obligations and regulatory requirements to protect the interests of their shareholders and the public at large.
Definition of "Private Company": Section 3(1)(iii) of the Companies Act defines a private company as a company which has a minimum of two members and restricts the right to transfer its shares. In the case of M/s. Ajanta Pharma Ltd. v. Securities and Exchange Board of India, the Securities Appellate Tribunal held that private companies have more flexibility in their operations and can operate with fewer regulatory requirements than public companies.
Requirements for Incorporation: Section 3(2) of the Companies Act sets out the requirements for incorporating a company, including the need to have a registered office, a minimum number of shareholders and directors, and a memorandum and articles of association. Rule 9 of the Companies (Incorporation) Rules, 2014 provides additional details on the incorporation process.
Memorandum of Association: Section 3(1)(a) of the Companies Act requires every company to have a memorandum of association, which sets out the company's objectives and powers. In the case of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, the House of Lords held that the objects clause in the memorandum of association defines the limits of a company's capacity to enter into contracts.
Articles of Association: Section 3(1)(b) of the Companies Act requires every company to have articles of association, which set out the rules and regulations for the management of the company. In the case of H.R. Harmer Ltd. v. J.R. McBride Ltd., the Court of Appeal held that the articles of association form a contract between the company and its shareholders.
Minimum Number of Members: Section 3(1)(c) of the Companies Act requires a public company to have a minimum of seven members and a private company to have a minimum of two members. In the case of Commissioner of Income Tax v. Vegetable Products Ltd., the Supreme Court held that the requirement for a minimum number of members is important to ensure that there is a sufficient number of persons interested in the company's affairs.
Registered Office: Section 3(2)(b) of the Companies Act requires every company to have a registered office where all official communications and notices can be sent. Rule 25 of the Companies (Incorporation) Rules, 2014 provides additional guidance on the location and maintenance of the registered office.
Directors: Section 3(1)(d) of the Companies Act requires a company to have a minimum of two directors. In the case of J.R.D. Tata v. Lala Shanti Kumar Narottam Lal, the Supreme Court held that the directors have a fiduciary duty to act in the best interests of the company and its shareholders.
Certificate of Incorporation: Section 3(4) of the Companies Act provides for the issuance of a certificate of incorporation once a company is registered. The certificate of incorporation serves as proof of the company's legal existence. Rule 12 of the Companies (Incorporation) Rules, 2014 provides additional guidance on the format and content of the certificate of incorporation.
Memorandum and Articles of Association: Section 3(1)(a) and (b) of the Companies Act require every company to have a memorandum of association and articles of association. The memorandum of association sets out the company's objectives and powers, while the articles of association set out the rules and regulations for the management of the company. In the case of A. Raghavendra Rao v. State of Karnataka, the Karnataka High Court held that the provisions of the memorandum and articles of association must be consistent with the Companies Act and cannot override its provisions.
Alteration of Memorandum and Articles of Association: Section 3(1)(a) and (b) of the Companies Act also provide for the alteration of the memorandum and articles of association. However, any alteration must be made in accordance with the provisions of the Companies Act and the company's articles of association. In the case of Tata Iron and Steel Co. Ltd. v. The State of Jharkhand, the Supreme Court held that any alteration to the memorandum and articles of association must be approved by the shareholders in a general meeting.
Share Capital: Section 3(1)(e) of the Companies Act requires every company to have a share capital. The share capital represents the amount of money raised by the company through the issue of shares to its shareholders. Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014 provides additional guidance on the issue and allotment of shares.
Objects Clause: Section 4 of the Companies Act requires the memorandum of association to contain an objects clause, which sets out the objects for which the company is formed. The objects clause restricts the company's activities to those set out in the memorandum. In the case of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, the House of Lords held that the objects clause is a fundamental part of the memorandum of association and any activities outside the scope of the objects clause are ultra vires and therefore void.
Doctrine of Ultra Vires: The doctrine of ultra vires is a principle of corporate law that prohibits a company from acting beyond the scope of its objects clause. Any activities outside the scope of the objects clause are ultra vires and therefore void. In the case of Attorney General v. Great Eastern Railway Co., the Court held that any activities outside the scope of the objects clause are null and void and cannot be ratified by the shareholders.
Doctrine of Constructive Notice: Section 3(3) of the Companies Act provides for the doctrine of constructive notice, which means that any person dealing with a company is deemed to have notice of the company's memorandum and articles of association. This means that any actions taken by the company must be in accordance with its memorandum and articles of association, and any person dealing with the company is deemed to have knowledge of its contents. In the case of Royal British Bank v. Turquand, the Court held that a person dealing with a company is entitled to assume that the company's internal procedures have been followed, provided that they appear to be regular on the face of it.
Common Seal: Section 9 of the Companies Act requires every company to have a common seal. The common seal is used to authenticate documents and contracts entered into by the company. Rule 26 of the Companies (Incorporation) Rules, 2014 provides additional guidance on the use and maintenance of the common seal.
Name of the Company: Section 4(2) of the Companies Act provides for the requirement of a unique name for every company. The name must not be identical or too similar to that of an existing company, and it must not violate any trademarks or intellectual property rights. Rule 8 of the Companies (Incorporation) Rules, 2014 provides additional guidance on the approval and reservation of company names.
Change of Name: Section 13 of the Companies Act provides for the procedure for changing the name of a company. Any change of name must be approved by the shareholders in a general meeting and must be registered with the Registrar of Companies. Rule 29 of the Companies (Incorporation) Rules, 2014 provides additional guidance on the procedure for changing the name of a company.
Annual General Meeting: Section 96 of the Companies Act requires every company to hold an annual general meeting (AGM) once every year. The purpose of the AGM is to transact the business of the company, including the approval of the financial statements, the election of directors, and the appointment of auditors. Rule 12 of the Companies (Management and Administration) Rules, 2014 provides additional guidance on the procedure for holding an AGM.
In summary, Section 3 of the Companies Act lays down the basic requirements for the incorporation of a company, including the minimum number of members, the requirement for a registered office, the need for a memorandum and articles of association, the share capital, and the objects clause. Companies must comply with these requirements to ensure that they are legally recognized and can operate in accordance with the law. The section also covers other important aspects such as the doctrine of constructive notice, the common seal, the name of the company, and the annual general meeting.
By Siddharth Dalmia
The StartUp Sherpa
+91-9971799250
dalmiasiddharth1994@gmail.com
